A federal appeals court recently struck down the fiduciary rule, an Obama-era rule that requires retirement account managers to put their clients’ interests above their own.
The U.S. Court of Appeals for the Fifth Circuit in New Orleans ruled to vacate this rule in March. In its opinion, the court concluded that the Department of Labor overstepped its regulatory authority by implementing the fiduciary rule.
According to Bloomberg Businessweek, the Trump administration has not yet appealed the ruling. And given the unlikelihood that the Trump administration, which directed the Department of Labor to examine the rule in February of 2017, will appeal it, the future of the fiduciary rule remains unclear for now — along with the future of investment adviser–client relationships.
What does this mean?
The fiduciary rule, or Fiduciary Duty Rule, is actually a package of seven rules issued by the DOL in 2016. It requires retirement account managers to put their clients’ interests first when advising them on retirement planning and related investments.
Since the fiduciary rule’s introduction, companies in the financial industry have moved to comply with the new rules. Merrill Lynch’s Investment Advisory Program, for example, has stopped charging clients commissions and moved to a fee-based model.
One of the goals of the fiduciary rule is to prevent unethical or exploitative financial recommendations that could negatively affect consumers.
Why should you care?
For the time being, while the Department of Labor examines the rule, your adviser is still expected to put your interests ahead of their own as spelled out in the Fiduciary Duty Rule. But depending on the outcome, that could change.
Despite the DOL’s examination of the rule, the Fifth Circuit judges said the case “is not moot,” since the rule has already “spawned significant market consequences” in areas of the brokerage and retirement investor industry.
With the fiduciary rule in limbo, the Securities and Exchange Commission has proposed a new package of rules — Regulation Best Interest — which claims to have similar goals as the fiduciary rule.
While it’s a good place to start, as the fiduciary rule is examined, the SEC-proposed regulation may not offer the same level of protection for consumers as the Department of Labor rule.
What can you do?
No matter the outcome of the fiduciary rule’s examination, one of the best courses of action may be to educate yourself — especially when it comes to understanding fees associated with your retirement accounts and other investment products you may be interested in.
Financial products can be complicated, and you should feel like you can ask your adviser how the products they’re offering work and how they’d receive compensation. If you’re not satisfied with their answers, consider working with a different adviser or another financial professional, such as a certified financial planner or a fee-only adviser.
Here are some other steps you might consider taking.
- Ask anyone handling your investments how their compensation structure works. If you’re satisfied with their answer, get it in writing, if possible.
- Consider taking your business elsewhere if you’re not confident that your investment broker or adviser is operating in your best interest.
- Keep your eyes peeled for new developments regarding both the fiduciary rule and the SEC’s Regulation Best Interest proposal.