Do you really want states to take the lead on fiduciary?

The Trump​ administration's proposed delay in the implementation of key parts of the Labor Department's fiduciary rule, and possible elimination of them, has opened a can of worms for the financial services industry. Those segments of the industry wishing the administration would simply do away with the DOL's rule might be sorry if their wish is granted. That's because multistate brokers and financial advisers could be forced to deal with a fruit salad of different state regulations, each defining who is a fiduciary in different terms, while smaller firms might have to live with tight fiduciary standards for the first time. The pattern has been set by Nevada, which in April passed a law expanding its definition of which financial professionals are fiduciaries and what their responsibilities to clients are. The law took effect July 1, and critics already are complaining that it conflicts with ERISA and SEC rules.

Nevada law

The Nevada law places fiduciary responsibilities on broker-dealers and registered investment advisers who previously were excluded from existing state law that referred to "financial planners." Nevada thus joins four other states that impose fiduciary standards on broker-dealers: California, Missouri, South Carolina and South Dakota. The standards in these four states were imposed through case law, not legislation. Now that attention has been drawn to the issue by the DOL rule and the Dodd-Frank law's mandate that the Securities and Exchange Commission study the issue, other states might decide to pass similar laws if the Trump administration revokes or weakens the DOL effort. According to a 2012 study by Michael Finke, now of​ The American College of Financial Services, and Thomas Langdon of Roger Williams University in the Journal of Financial Planning, 14 states do not impose fiduciary standards on broker-dealers and 32 others have limited fiduciary standards — that is, standards that "exceed the suitability standard set forth under Finra rules, but do not expressly classify broker-dealers as fiduciaries." Those opposed to the DOL fiduciary rule have argued it would reduce access to financial advice for middle- and lower-income investors because the costs of complying with the rule and the added liability will make advice too expensive. In their 2012 study, Mr. Finke and Mr. Langdon explored the possible effect of a national fiduciary standard on investors, particularly the middle class, by examining the level of consumer access to financial advice in states that have fiduciary standards compared with states that do not. They found that the percentage of advisory clients with incomes of $75,000 or less was statistically the same in fiduciary states as in non-fiduciary states. That is, the level of middle-income consumer access was no different. In addition, they found that the ratio of registered reps to total households in fiduciary states, limited fiduciary states and non-fiduciary states was almost identical, confirming lack of access was not a problem in fiduciary states. The professors concluded that there is "no evidence that the broker-dealer industry is affected significantly by the imposition of a stricter legal fiduciary standard on the conduct of registered representatives." The one notable difference shown by the study is that 71% of respondents in fiduciary states felt the cost of compliance was significant compared with 62% in non-fiduciary states. The study suggests that neither the adoption of the DOL rule nor the Nevada law will have much effect on investors. While the DOL rule pertains only to investment advice in retirement accounts, the Nevada law applies to all accounts. However, the Nevada law must be fleshed out by regulations "defining or excluding practices or courses of business as violations" before the impact can be determined. Some might argue that red states are unlikely to want fiduciary laws if the DOL rule is thrown out by the Trump administration, while blue states might decide to fill the gap. However, the majority of states that now have such standards are red states. Opponents of the DOL rule might consider the possible complications arising from a successful campaign to have the current administration roll it back: many and varied state fiduciary laws to complicate their lives. They might find themselves clamoring for the SEC to produce a fiduciary rule to preempt the state laws.