DOL Fiduciary Rule is Dead.

DOJ Fiduciary Rule Dead.jpg

What it Means for You.

In a 2-1 decision on June 21st, the Fifth Circuit Court of Appeals sided with a group of financial industry plaintiffs to effectively put an end to the Department of Labor's fiduciary rule, which would require all financial advisors to act in clients' best interests with regard to retirement accounts.

“AARP is disappointed in the Court’s decision denying AARP the right to intervene to protect the retirement advice provided to our members and other Americans saving for retirement,” the AARP said in a statement. “AARP will continue its efforts to fight on behalf of consumers who want financial advice in their best interest. It is hard enough to save for retirement – we should do all we can to make sure retirement savers are getting the help they need.”

The DOL proposed fiduciary rule was meant to protect retirement savers when they receive advice. It was struck down not because of the rule itself, but it was determined that the DOL overreached its mission by establishing the rule.

The DOL aimed to make all advisers play by the same rules, only applying to retirement accounts. In general, the new protections, according to the Labor Department’s FAQ, would have required that advisers do the following:

  • Satisfy a professional standard of care when making investment recommendations (give prudent advice);

  • Put their customer’s interest first when making recommendations (give loyal advice);

  • Avoid misleading statements about conflicts of interest, fees and investments;

  • Follow policies and procedures designed to ensure adherence to the best interest standard and to prohibit financial incentives for advice that is not in the customer’s best interest;

  • Charge no more than reasonable compensation for their services; and

  • Disclose basic information about fees and conflicts of interest to retirement investors.

Investors should demand that the advisor put in writing that they are fiduciaries at all times for all advice in the relationship. The vast majority of financial professionals will not be able to do that.

What loopholes would have been closed by the rule?

The rule would have closed the large loopholes that permitted conflicted investment advice. For instance, now advisers such as securities brokers or insurance agents have financial incentives that reward them for steering customers to products that aren't in the customers’ best interest.

Which advisors would have been affected by a “fiduciary standard”?

Examples of advisors currently not under the “fiduciary standard” are investment advisors who are paid commissions, annuity salespeople and anyone who receives payments from third parties.

Some advisers — those who are registered investment advisers (RIAs) — already act in a client’s best interest for both taxable and retirement accounts. Certified Financial Planners (the high-bar standard) are required to act in their clients’ best interests all of the time in every area of financial advice.

But there are a good many advisers out there who are neither RIAs nor investment adviser representatives (IARs) and who are not necessarily required to act in a client’s best interest; who — because of conflicts of interest such as higher commissions paid to sell certain products — might provide bad advice.

The Securities and Exchange Commission is moving forward as fast as possible with its own best-interest standard for financial professionals who work with retail investors. (The Court reaffirmed the role of Congress and the Securities and Exchange Commission to regulate agents and advisors.)

With any regulation far from being enforced, investors need to know whether their advisor is acting as a fiduciary. “Best interest” and “fiduciary” are not the same.