As you may recall, under the Obama administration, the Department of Labor passed the Fiduciary Rule which addressed the standard of care that an advisor has to their clients in regard to retirement plan accounts. A fiduciary standard means the advisor is ALWAYS required to act in the client’s best interest, whereas a suitability standard states the advisor must merely offer suitable or reasonable advice. The rule required that all financial professionals who work with retirement plans or provide retirement planning advice must act as a fiduciary.
The rule would require significant changes to the way brokers did business and it would require significant steps for firms to take from a compliance perspective. Many opposed the rule as it would limit the investments that could be used in retirement accounts. It forced brokers to address conflicts of interest in recommending that clients roll their 401k plans to IRAs and it would hamper the sale of high commissioned products which many brokers relied on for their livelihood.
When Trump took office in 2017, he ordered that the rule and its impact be reviewed. Given the pro-business and anti-regulation platform in Washington, the rule going into effect was in jeopardy. The rule’s applicability date was revised from April 10, 2017, until June 9, 2017. There was then a transition period that would run through January 1, 2018, to allow firms to update their systems, processes and compliance procedures related to the fiduciary standard. Full implementation of the rule was scheduled for July 1, 2019.
On March 15th, 2018, the Fifth Circuit Court of Appeals vacated The Fiduciary Rule saying it was unreasonable and that implementation of the rule would be “an arbitrary and capricious exercise of administrative power.” Rather than make an appeal to The Supreme Court, on March 19th, 2018, the Department of Labor said it would not be enforcing the rule. The final step for the rule to be eliminated is for the Court to issue a mandate making the March 15th decision effective. Although the mandate has not yet been issued, it is expected to be by the June 13th, 2018 deadline. In the meantime, the Department of Labor has turned over the responsibility for investment advice reform to the SEC. The initial proposal that the SEC has set forth is similar to the DOL’s Rule, but with significant changes as to how the rule is enforced.
So what does this mean for you? While the rule will not become law, it did bring to the forefront issues surrounding the dissemination of investment advice. Investors are more aware of the need to be cognizant of costs and to question advice rather than just assume that what is recommended is always in their best interests. As an investor, if you are working with a professional who is a CFP®, you can have confidence that that person is acting in your best interest as the board has implemented a fiduciary requirement (effective 10/19), and if you are working with an Investment Advisor Representative, that person is also required by law to act as a fiduciary. Investors now know that there are options besides commission-based salespeople who are peddling products – there are advisors who are fiduciaries, who always put their clients’ interests first, who disclose and seek to eliminate conflicts of interest and who offer low-cost investment solutions – firms like Core Wealth Management.