The Fiduciary Rule Struck Down: Whom Do You Trust to Look After Your Investment Assets?
In March 2018, a U.S. Circuit court struck down the Fiduciary Rule – a rule which required financial advisors to act as “fiduciaries,” or act in the best interest of clients, with respect to their retirement assets. The Department of Labor’s Fiduciary Rule was first proposed in 2010, later ratified in 2015, and was scheduled to go into effect as of June, 2018.
This regulation was the Department of Labor’s attempt to protect consumers from non-fiduciary financial advisors (mostly brokers) who steer clients into inferior products that have higher fees and likely lower returns. As it currently stands, institutions offering financial advice fall into two categories: Broker-Dealers, who maintain a suitability standard, and Registered Investment Advisors, such as WESCAP Group, who must maintain a fiduciary duty to their clients. For institutions allowed to follow a suitability standard, many advisors are incentivized to sell specific products to clients regardless of whether or not it is in the clients’ best interest, whereas Registered Investment Advisors must always put clients’ best interests before their own.
In 2016, the White House Council of Economic Advisers (CEA) estimated that $1.7 trillion of IRA assets were invested in products that provide payments that create conflicts of interest. The CEA also estimated that conflicts of interest lead, on average, to one percentage point lower annual returns on retirement savings and cost America’s families $17 billion every year.
In the wake of the U.S. Circuit court ruling, institutions like JP Morgan and Merrill Lynch, who were some of the first institutions to adhere to the DOL Fiduciary Rule, are now preparing to roll back changes to their retirement account policies and products in order to loosen restrictions they expected would be in place as fiduciaries. These firms were some of the first to prohibit the use of commission-based retirement accounts, but it appears many will revert to old practices.
While there is a possibility that the SEC moves forward with their own set of “best interest” rules, it is unclear whether or not these rules will hold financial advisors to the fiduciary standard.
Sources:
https://www.dol.gov/newsroom/releases/ebsa/ebsa20160406-0
https://www.wsj.com/articles/fiduciary-rule-dealt-blow-by-circuit-court-ruling-1521164915