Judge Upholds Fiduciary Rule that Benefits Retirement Investors
The concept that financial advisers should put their clients’ financial interests above their own doesn’t seem very controversial, but the financial industry has fought back against a Department of Labor fiduciary rule that would codify a stronger standard of care owed to retirement account investors by their advisers.
The rule protects investors against conflicted investments.
In a win for investors, the Labor Department beat the industry’s latest challenge to the rule, which is scheduled for April 2017 implementation. However, a review order from President Trump casts doubt on whether the rule will actually take effect.
The Business Trial Group breaks down the recent legal development surrounding the fiduciary rule and explains what they mean for retirement investors.
What is the Department of Labor’s new fiduciary rule?
The rule requires financial professionals who sell IRAs, annuities, and other investment products to act in their client’s best interests when making retirement account recommendations—even for one-time transactions. This is a higher standard than the current requirement that advisers must merely recommend products that are “suitable” for investors.
Proponents of the new fiduciary standard say it is needed to stop advisors from steering clients towards investments that charge higher fees and commissions—investments that may result in higher profits for the adviser, but aren’t always in the client’s best interests. A study published last year found that pervasive financial adviser misconduct costs investors hundreds of millions of dollars per year.
Regulating conflicts of interest with the new rule could save retirement investors up to $36 billion over the next 10 years and $76 billion over the next 20 years, according to the Department of Labor.
Who is opposing the new rule?
Big financial industry groups have filed three legal challenges to the fiduciary rule. The most recent challenge was brought by the U.S. Chamber of Commerce, the Indexed Annuity Leadership Council (IALC), and the American Council of Life Insurers (ACLI). Other groups challenging the rule include the Financial Services Institute (FSI), the Securities Industry and Financial Markets Association (SIFMA), and the Financial Industry Regulatory Authority Inc. (FINRA).
It’s uncertain where individual brokerage firms stand on the rule. While Merrill Lynch has expressed support for a heightened standard of client care and said it will end commission-based retirement accounts regardless of the rule, other firms appear to be hedging their bets.
Rule opponents claim it would limit investment advice opportunities.
A letter sent from three consumer financial protection groups to industry groups states, “We believe the public needs to know where individual firms stand. Those opposing the rule are hiding behind their trade associations who are filing lawsuits, pushing legislation, and subverting the regulatory process to delay and kill the rule.”
Fiduciary rule opponents claim that the rule “would harm retirement investors with small accounts and limit their investment opportunities and investment advice opportunities,” according to Forbes.
Does the Trump Administration want to overturn the rule?
Following the court’s decision to uphold the DOL fiduciary rule, President Trump issued a memorandum directing the secretary of labor to review the rule and possibly rescind or revise it based on the review’s findings.
While the President’s order seems certain to delay the rule’s implementation beyond the current April 10, 2017 target, legal experts generally agree that the new administration faces an uphill battle trying to roll back the rule, which has now survived three legal challenges and which many firms, brokers, and agents have invested time and resources to comply with.
How does the new rule impact retirement investors?
Assuming it survives scrutiny and is implemented, the rule will help ensure that clients receive retirement investment advice that is in their best interests. This is expected to save retirement savers billions of dollars per year in fees and commissions.
Nearly 1 in 10 advisers have a misconduct record.
In addition, the rule’s stronger fiduciary standard may make it easier for investors whose best interests aren’t represented to take legal action against financial advisers. With the new rule in place, if an adviser puts their own interests ahead of their client’s interests, the client may be able to recover the money lost as a result of the conflicted investment.
Financial advisers are a scrutinized group, and for good reason: nearly 1 in 10 advisers have a misconduct record, and prior offenders are routinely reemployed. A FINRA broker background check can identify questionable advisors. Any suspicious activity in your account should be discussed with an attorney.