DOL Fiduciary Rule Is ‘Biggest Change That We’ll Go Through’: Pershing

By Emily ZulzStaff Reporter@think_emilyz

NOVEMBER 23, 2015

The real impact of the new DOL fiduciary rule won't be felt immediately, Pershing’s John Brett says, but two to five years after it takes effect

"This way that securities have been sold here in the United States … fundamentally changes” once the rule goes through, Brett says.

Could the Department of Labor’s impending new fiduciary rule fundamentally change the industry as it is today?

John Brett, managing director and member of the executive committee for Pershing LLC, a BNY Mellon company, believes the industry is on the cusp of one of the biggest changes it has seen.

 “Once the Department of Labor comes through, this way that securities have been sold here in the United States … fundamentally changes,” Brett said during a visit to ThinkAdvisor’s New York office. “That to me, in my 34 years on Wall Street, is the biggest change that we’ll go through.”

The final version of the Department of Labor’s rule to amend the definition of fiduciary under the Employee Retirement Income Security Act is expected sometime next year.

Under ERISA, advisors would be prohibited from engaging in transactions that entail conflicts of interest for the client unless there is an exemption. Advisors and clients would be required to sign best interest contract exemption contracts, in which broker-dealers and advisors acknowledge the new fiduciary standards and their impartial conduct codes.

The industry won’t see the real impact of the DOL fidicuiary rule when it’s first put into place, Brett said.

“That best interest contract and I present that to you. You sign it, return it back to me. That’s year one,” he said.

The DOL’s fiduciary rule’s real impact will be seen in years two through five following the final ruling.

In year two, Brett predicts the fiduciary rule having an impact to advisor prospecting.

“Year two, a new advisor prospects you, and he simply asks, ‘[Have] you signed a best interest contract?’ And you say, ‘Yes, in fact I have it in front of me.’ So it’ll be very quick that you’ll be able to undercut the price I might be to you.”

Brett also sees the DOL’s fiduciary rule having a big impact on certain distribution models, like insurance companies, that have compensation plans for their proprietary solutions.

“What does that mean in a fiduciary world when that comes into play?” Brett asked. “Will that stand the rigor?”

The DOL’s fiduciary rule also requires information on exactly what and who gets paid via product sales to be published in detail on publicly available websites in a readable format – as well as point-of-sale disclosures with one-, five- and 10-year cost projections for each product sold and annual reports on the products.

“Will they, insurance companies as an example, exit the distributions side?” Brett said. “Will they just manufacture and sell their product everywhere else rather than have an owned insurance sales force? Or will they go the other way, which is pull back dramatically from the full-service financial advisor and simply have insurance salesmen selling simple life policies very differently and then sell it as best interest contract in place there?“

As Brett sees it, the salespeople in the industry have already started changing.

“You see the global banks that have exited distribution here in the [country] – you know Credit Suisse, and firms like that, all the way through what’s taking place when AIG made its announcement,” Brett said. Adding, “And if I was in my previous role in life, I’d be doing the same thing.”

Brett began his career as an investment professional at Merrill Lynch and held a number of key distribution roles during his 23 years there.

“The industry is making changes to its structure now and that advisors better understand that,” Brett said.

The striking thing to Brett has been that not every firm is addressing that DOL challenge the same way, he said.

“You would have thought they all would have been spending a lot of time on it,” he said. “[I] had a meeting not long ago with an asset manager that has over 1,000 people focusing on the Department of Labor and changes to the business. Then, another firm, similar size and brand, has no one spending on it.”

The same goes for broker-dealers, where Brett said there’s a group that’s “clearly prepared” and another with “their head in the sand.”

“And then there’s a chunk – and we’ve seen it almost every day now - of a broker-dealer either in play or sale or exiting the business,” Brett said. Adding, “I think those are all precursors to whatever happens with this Department of Labor.”

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