The fiduciary rule, a regulation that required financial advisers to put their clients’ interests ahead of their own, is now dead.
Enacted in 2016 after five years of development in the Department of Labor, the fiduciary rule was slated to go into full effect in 2019. But a federal court of appeals made a decision that voided the rule, finding that the Department of Labor overstepped its authority.
Fiduciary basics
In a financial sense, fiduciaries are required to act in their clients’ best interest. Advisers must always recommend solutions that are “suitable” to the client. But when weighing such “suitable” options, investment professionals who are not fiduciaries are still free to recommend products that come with higher commissions.
The fiduciary rule required financial professionals to ensure investment advice was accurate and complete, to disclose potential conflicts of interest, to disclose clearly all fees and commissions, and to make investment recommendations that were consistent with a client’s goals and risk tolerance.
Registered Investment Advisers are already governed by a fiduciary responsibility. But many brokers, insurance professionals, and others in the financial industry are not. The fiduciary rule would have applied fiduciary-level standards to the wider body of financial professionals.
Industry concerns
The problem, for some, was the added expense and liability created by the fiduciary rule. By some accounts, the rule would have made it difficult for advisers to service some small investors while generating sufficient revenue for their work. Others argued that the rule was poorly defined and put even ethical, well-intentioned advisers at risk of facing costly litigation.
Some advisers planned to increase their fees to cover the new expenses and make up for the loss in commissions. Others intended to increase the minimal investable assets someone needed in order to become a client.
Vetting your advisers
The fiduciary rule is now dead, but its legacy lives on.
In part, the fiduciary rule helped bring adviser responsibilities and compensation models to the forefront of discussion. Such conversations have helped individual investors realize there are advisers who serve as fiduciaries and others who do not. The fiduciary rule also opened broader conversations regarding fees and business models.
Many advisers who are not fiduciaries operate on a commission basis. There are plenty of ethical advisers, and commissions are not necessarily a bad thing. Investors should feel empowered to ask the tough questions such as, “What fees am I paying? Are they appropriate? How do these fees affect my retirement plan? Are there lower cost options available to me, outside your services?”
Ask your adviser if he or she is a fiduciary, and if not, why not. You may find that your adviser is doing a good job for you, even without the strict fiduciary parameters.
Consider how much financial advice you want and if the associated fees are worth it to you. Just the fact that an adviser you’re working with is a fiduciary doesn’t mean that adviser is the best fit for you.
What’s next?
Some firms have already made significant investments to adhere to the fiduciary rule and they’re going forward with those plans, even though they don’t have to. This means they may be channeling more of their clients’ money into fee-based accounts rather than commission-based products.
In the meantime, the Securities and Exchange Commission is working on an alternate rule that would call for a standard of conduct that exceeds “suitable” yet falls short of “fiduciary” requirements. Legislation has been enacted or is pending, in several states to impose best-interest or other standards on financial institutions and their personnel.
