The new rules on fiduciaries that will be introduced by the Department of Labour (DoL) in the US have been well-received by wealth managers, although clarity on how the regulation will be implemented and how structured providers will respond appear to be rather complex. "Conceptually, what is being asked should not hurt the structured products industry over the long run," said Matt Ginsburg, executive vice president, head of retail sales & marketing, investment solutions group at Wells Fargo, speaking on a panel at the SRP Americas conference in Boston on June 16.
The rule is designed for the point of sale and kicks in if there is there is a recommendation and if that advice is offered to a retirement account. "I am pleased about the rule," said Tom Balcom, founder of 1650 Wealth Management. "We are fiduciaries."
The most pressing question for product providers in the US revolves around how the new regime will affect issuers that distribute products solely to their own advisers and whether or not it means that they will need to adopt open architecture.
It is also unclear when exactly the rule will be applicable, and whether it will include transfers from pension plans into 401(k)s - the tax-qualified, defined contribution pension account - or to individual retirement accounts. "That decision is subject to these rules," said Christopher Schell, partner, derivatives and structured products group, Davis Polk & Wardwell.
If this transfer is within the new structure, that is good news for structured products, according to Balcom. "If you are rolling over from a 401(k) that has mutual funds into a portfolio that is more thoughtfully created, that has structured products which provide downside protection, the DoL would probably rule that as a favourable outcome," said Balcom.
However, the sheer scale of the new rule and the number of people who may well be bound by it for so many investment transactions is such that the effect on structured products may be submerged. "As an issuer, we are concerned about reports that US$1bn of assets will be affected by this rule, of which structured products is just a small sliver," said Nkonye Okoh (pictured), executive director, head of private bank & wirehouse structured product distribution at JP Morgan. "If there is a blanket stop while they figure out which method they are going to go to, structured products are at risk. I fear we may have to go back to the drawing board to make the case for why structured products should be in portfolios and why people should use structured products, setting us back five, six, seven years.
"Now that the SEC [Securities and Exchange Commission] has announced that it will not make its decision until after the [US Presidential] elections [in November], there is some looming guidance that people are waiting on," said Okoh.
One of the principle complications comes in the form of the application of advice in the best interests of the investor that is aimed squarely at retirement advice, which will presumably frequently be given at the same time as guidance on other investments, for which it would appear that a much lower standard of advice would be acceptable. "It is going to be hard to have, for the same customer, two different types of ways of dealing with them, one fiduciary and one not fiduciary," said Schell.
More worrying is the number of people that may end up without advice. "If you think of moving everyone to advised accounts, there is going to be a subset of clients who just do not qualify, because, even if you move all of their assets, there is no fee schedule that makes sense, where you can cover your costs and service them," said Okoh. "Where do they go? You are just dropping a huge source of assets out into the ether to advise themselves, which is what we were trying to prevent - having people invest and not know what they were doing. We are enabling that by... having this ultimatum of either you pay a fee, 'oh wait, you don't qualify, so now you're on your own', which undermines what the regulation was trying to do."
If it turns out that there is a category of retirement investors who are not suitable for the fee-based account, what that means is they really are on their own. "The JP Morgans and the Wells Fargos are not going to be able to talk to them and suggest anything about an investment, because the way the rule was written is so broad that that might be a recommendation," said Schell.
"Just getting information to those investors may be very difficult and, probably, the more conservative institutions will say they will not talk to them at all," said Schell. "That's a very different world from now, when they can talk to people, weigh the advice, understand the person is going to make a commission, but at least they are going to be presented with ideas. That won't happen if they are outside that."
Since the SEC has subsequently announced that it will also opine on fiduciary rules, there is also now a confusion in the financial markets, particularly if the rules clash with those of the DoL. "There is also a political influence, with the Department of Labor opining on something that you would think would be the SEC's jurisdiction," said Okoh. "What does that entail, and where is that going to lead us?"
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