Latest / Bloomberg Intelligence / Pershing's Cirrotti on Outlook for DOL Fiduciary Rule (Audio)

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Pershing's Cirrotti on Outlook for DOL Fiduciary Rule (Audio) · Bloomberg Intelligence

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  Speaker 1: gain of point four percent. I'm Charlie Pellet, and that
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  Speaker 1: a Bloomberg business flash. You're listening to Taking stock with
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  Speaker 1: Kathleen's and pim Fox on Bloomberg Radio. We are broadcasting
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  Speaker 1: live at Pershing's Inside Twenties sixteen conference at the Higher
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  Speaker 1: Regency in Orlando of Florida. Now to tell us more
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  Speaker 1: about a very important ruling from the Department of Labor
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  Speaker 1: having to do with fiduciary responsibilities is having to affect
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  Speaker 1: not only registered investment advisers but also those who are
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  Speaker 1: managing pension assets. Let's find out more from Robert Serati.
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  Speaker 1: He is Managing Director Pershing Melan l l C. And
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  Speaker 1: he is the head of the retirement and Investment Solutions
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  Speaker 1: for Pershing. Thank you very much for being here, much appreciated,
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  Speaker 1: Thanks for having us my pleasure. Thanks for having me
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  Speaker 1: tell people what exactly the new rules from the Department
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  Speaker 1: of Labor as much as you know them, because I
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  Speaker 1: know that they are still being sort of finalized in
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  Speaker 1: terms of the details. What you know about these new
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  Speaker 1: rules and what is the most important thing that the
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  Speaker 1: people here particularly need to know about. So first off,
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  Speaker 1: the rule has been finalized. It was final finalized last month,
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  Speaker 1: and today is actually the day that the rule is
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  Speaker 1: officially effective. Um now effective means that it's a it's
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  Speaker 1: a live, real rule. But the changes really come next
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  Speaker 1: year when the compliance states kick in with regard to
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  Speaker 1: what the Department of Labor was doing. UH. This is
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  Speaker 1: all in an attempt to eliminate conflicts of interests associated
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  Speaker 1: with investment advice that's given to retirement investors. UH. The
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  Speaker 1: way that the Department went about making those changes is
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  Speaker 1: essentially by looking to create a lower bar for what's
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  Speaker 1: considered investment advice under ARISSA, and by lowering the bar
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  Speaker 1: of what's investment advice, they're causing more advisors to become fiduciaries.
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  Speaker 1: And when you become a fiduciary, you therefore have to
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  Speaker 1: give advice that's in the best interest of your clients. Well,
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  Speaker 1: rob most people in this industry would say, have always
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  Speaker 1: of an advice that was in the best interests of
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  Speaker 1: my clients. If I didn't do that, if my clients
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  Speaker 1: didn't get good results over time, I wouldn't be in business.
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  Speaker 1: That that's true, right, So, so many advisers and firms
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  Speaker 1: feel that they do act in the best interests of
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  Speaker 1: their clients, But when it comes down to the technical
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  Speaker 1: rules that they're following and how that manifests itself. UH.
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  Speaker 1: In the broker dealer market, brokers who are working on
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  Speaker 1: a commission basis are required to meet a suitability standard
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  Speaker 1: today under under finneral rules UM. And so that suitability
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  Speaker 1: standard is very different from a best interest standard when
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  Speaker 1: you have to essentially defend yourself from it UM. And
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  Speaker 1: so it looks very different if you will under ARISKA
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  Speaker 1: given the requirements and as a result of this rule,
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  Speaker 1: some of the new exposures and liabilities that are created
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  Speaker 1: for advisors and what it will mean for them to
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  Speaker 1: not only give advice that's truly in their best interests,
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  Speaker 1: but also then to have to defend it at that standard. Now,
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  Speaker 1: to be a fiduciary under the risk rules you as
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  Speaker 1: you describe, you have to act prudently solely in the
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  Speaker 1: interest of his or her client. But there are also
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  Speaker 1: specific prohibited transaction rules as I understand it, which can
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  Speaker 1: trigger some tax penalties under tax law. What if you
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  Speaker 1: could talk a little bit about that. Sure, So with
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  Speaker 1: respect to UM prohibited transactions and when you need exemptions UM,
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  Speaker 1: it's sort of counterintuitive candidly that under arissa UM getting
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  Speaker 1: paid as a conflict. Uh So just to get paid
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  Speaker 1: you need an exemption. And there are existing exemptions that
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  Speaker 1: the industry relies on today that are so embedded in
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  Speaker 1: the way that we've done business so for many years
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  Speaker 1: that many advisers and aren't thinking about the exemption that
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  Speaker 1: they're relying on when they're when they're doing business today. Um.
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  Speaker 1: So what the Department has done is essentially say, um,
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  Speaker 1: now that you have to act at this fiduciary standard
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  Speaker 1: in this and meet this best interest standard of care. Um,
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  Speaker 1: you now have to eliminate new conflicts around differentiated compensation,
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  Speaker 1: the idea that I might get paid more if I
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  Speaker 1: recommend one investment versus a different investment, and that differentiation
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  Speaker 1: leads to this new set of requirements to say, if
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  Speaker 1: you have that, you have to rely on these new exemptions.
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  Speaker 1: So what they did was they narrowed some of the
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  Speaker 1: existing exemptions that firms rely on today and they created
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  Speaker 1: two new exemptions, the primary one being this best interest
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  Speaker 1: contract exemption. So we use the language of exemptions, but
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  Speaker 1: really what exemptions are is a path forward or its
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  Speaker 1: relief from the conflict that would otherwise prevent you from
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  Speaker 1: being able to be compensated. And so those are the exemptions.
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  Speaker 1: That's the major exemption that the Department is called. Okay,
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  Speaker 1: so a lot of investment advisors say that with these
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  Speaker 1: new limitations, it will be harder to make money, and
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  Speaker 1: therefore people with smaller investment accounts will have a harder
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  Speaker 1: time finding an advisor who will represent them. This exemption
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  Speaker 1: you just mentioned byes B, I, C E UH is
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  Speaker 1: supposed to get around that to a certain extent by
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  Speaker 1: allowing them to I just feel like the exception was
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  Speaker 1: put in because the Department Labor realized that it was
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  Speaker 1: handcuffing too many people and it had to put something
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  Speaker 1: back in. So the people without a lot of money
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  Speaker 1: because still got some investment advice. So so the exemption
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  Speaker 1: is meant to facilitate um a continued ability to do
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  Speaker 1: business on a commission basis. Essentially UM so so they
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  Speaker 1: didn't want to be what they considered draconian in eliminating
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  Speaker 1: commissions from the business. However, relying on the exemption creates
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  Speaker 1: new exposure for firms and so given new exposures as
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  Speaker 1: a result of reliance on that exemption in the form
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  Speaker 1: of a contract UM and the liabilities that could created
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  Speaker 1: in that contract, specifically the potential for class action lawsuits UM.
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  Speaker 1: The advisors are UM sort of resident. If you will
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  Speaker 1: to UM make sure that they're they're meeting all of
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  Speaker 1: the requirements of the exemption, and to the extent that
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  Speaker 1: those requirements caused them to put new process in place.
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  Speaker 1: We talked about prudent process before. Right, there are new
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  Speaker 1: costs that they may have to uh encourabe the very least.
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  Speaker 1: They just have to take people what they're doing, what
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  Speaker 1: they're charging, what they're paying for and why is that
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  Speaker 1: inter nutshell? Right, they certainly have to do that. Um
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  Speaker 1: and and uh, you know, this contract is really at
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  Speaker 1: the heart of it though, UM and the fact that
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  Speaker 1: they could be open to class action lawsuits, UM and
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  Speaker 1: and so and so that really drives the concern that
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  Speaker 1: firms have that they really have to validate the value
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  Speaker 1: that they're providing to their investors. Robert Sirotti, thank you
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  Speaker 1: so very much for joining. It's a complex question, but
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  Speaker 1: a very big one. The Department of Labor's new fiduciary
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  Speaker 1: rules were broadcasting live at Pershing's Insight conference in Orlando.
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