Will Trump Reverse Obama's DOL Fiduciary Rule for Retirement Accounts?Fiduciary
A new Department of Labor rule was set to go into effect April 10 that would require any advisor working with client retirement accounts to do so under a fiduciary standard…in other words, advising in the best interests of the client.
On Friday, President Trump instructed the DOL to “review” the new rule, so we have yet another delay to retirement savers getting the regulatory protection they should expect.
And this after the SEC spent only six years reviewing the issue, too weak to implement the Nike slogan and Just Do It. When the SEC wouldn’t get off the dime, the DOL stepped into the leadership vacuum and established higher standards for advisors serving retirement savers. (Yes, that does seem strange, but in our regulatory hodge-podge the Department of Labor oversees retirement accounts.)
No surprise, the DOL’s actions stirred fireworks aplenty from those in the financial industry with a vested interest in the (conflicted) status quo. And the industry hasn't been winning any court battles appealing it.
So what’s the big deal?
The big deal is investment and advice in retirement accounts isn’t like buying a mattress or microwave.
Retirement accounts involve peoples’ hopes and dreams, and their ability to pay for the final decades of life. There are often complexities in retirement accounts, investments, and cost structures that retirement savers themselves don’t fully understand. Isn’t that something worthy of the highest standards on those advisors that work with them?
I’m generally an advocate of limited government, eliminating unnecessary rules and procedures. But I want strong regulation where it really counts…sort of like how a very heavy door can swing nicely for decades on three strong, strategically placed hinges.
What’s the difference between “fiduciary” and advisors who aren't?
Fiduciary is just a fancy word that means the advisor must place client interests ahead of their own, avoid conflicts of interest, and disclose any conflicts that can’t be avoided.
An “advisor” is not necessarily always a fiduciary, but a fiduciary is always required to advise you according to what’s in your best interests. As such, most folks are best served by a financial professional who embraces a fiduciary standard (or would be subject to it, as in the DOL rule).
The confusion stems over a couple of issues: (1) there’s currently a double-standard in our laws and regulations, and (2) anyone can call themselves a financial planner, advisor, consultant, wealth manager, etc. without actually providing the advice (in your best interest) that those titles imply.
Currently on the regulatory front, one set of rules is for people who sell financial products, generally investment brokers and insurance company representatives. Technically, they are contractually obligated to place the interests of their employer ahead of your interests. While they can only sell you financial products that regulators consider “suitable,” they may sell you whatever suitable product makes the most money for them or their employer instead of what may be better for you.
The other set of rules is for those who are registered as investment advisors with the federal Securities and Exchange Commission (SEC) or state regulators. These professionals provide investment advice, management, and/or financial planning. As fiduciaries, they are legally obligated to place your interests ahead of their own and adhere to a high standard of professional competence.
If an “advisor” is not a fiduciary, that doesn’t make them a bad person or automatically mean that they’ll bilk you out of your hard-earned money. Just make sure you know what you need, who you’re dealing with, how they’re regulated and compensated, and look beyond the titles they use.
Back to the DOL rule under President Trump...we'll just have to see how that plays out. If it gets reversed (and the status quo continues), perhaps Barry Ritholtz stated it best in his February 6 Washington Post article:
Whether the fiduciary rule stays or not, the investing public has figured out what the proper standard should be. Investors are not waiting for the government to make the finance industry put investors’ interests first. As market forces have revealed, they are insisting on it themselves.