The Fiduciary Rule is Dead?
Summary: The Fiduciary Rule, intended to eliminate predatory practices that have been costing retirement investors billions in lost returns, will not take effect on April 10 as previously scheduled. Its implementation is delayed for 180 days and analysts assess that the Department of Labor will not implement it then, either. A related executive order directs the Treasury Department to review regulations that inhibit Americans making, ” . . . independent financial decisions and informed choices.”
Fiduciary Rule Delayed 180 Days
The Administration directed the Department of Labor to cease work on implementing the Fiduciary Rule. The rule would have taken effect April 10, 2017, but its future is now doubtful, given a 180 day delay to assess its impacts. In a nutshell, licensed and registered financial advisers (financial product salespersons or FPS) engaging with either institutional or individual retirement plans would have been required to recommend investments that were in your best interests rather than applying the “roughly suitable” rule currently providing safe harbor in the industry. This is a setback for retirement investors and increases the importance of being an informed investor before discussing any particular investments with your FPS. The rule was not to have applied to investments in general, just to retirement plan investments. As a side note, McFarland-CPA does not recommend specific acquisitions of named products to its clients, instead providing an analytical framework from which to interact with those who do. We think education and information is the key to a satisfactory relationship with any salesperson.
FPS’s Interests Not Aligned With Yours
Up till now, FPSs could be compensated in many different ways and only a fee-only FPS could be assumed to really be in your court. Cases of “churning,” when a broker simply buys and sells in your retirement account in order to generate transaction fees, are not hard to find. The sales of front-loaded funds and insurance-like investment products were other sources of FPSs’ revenue that did not necessarily align the FPSs’ interests, as the advisor, with yours, as their client. In another example, we have seen many clients who did not actually qualify as sophisticated investors (a term with pretty good common law definition) being taken advantage of by boiler room operations selling doubtful investments in shady limited liability corporations. The LLCs then go bankrupt with our clients losing everything. It is uncertain whether the final result will curtail these types of predatory practices but they clearly fall within the topic generally.
Fiduciary Duty Was Key Reason for Change
The previous administration had sought to force FPSs to be their retirement clients’ advocates rather than arms length adversaries as is now the case in some cases. Without fundamental changes to the industry, after the rule’s implementation, these sales professionals would have been open to slam-dunk lawsuits unless they could prove they actually were acting as fiduciaries. At least that was the scuttlebutt in the industry’s backchannels. The fiduciary duty is a bar that many would not have been able to meet and still remain in the industry. Converting to a fee-only professional basis, as is common with attorneys, CPAs, and other professionals, would not have been possible for many given the saturation already existing in the market. There is a notable hesitance for consumers to leave indirectly-compensated brokers for fee-only professionals. We’re ok with that, so long as it’s clear that the consumer understands the person on the other end of the phone has an agenda that isn’t necessarily aligned with your welfare. If your physician might be providing you with advice that wasn’t in your interest, how long would you retain her or him?
Assessment: Maintained Vigilance and Consumer Education Will be Key
With the delay and possible cancellation of this rule, those most vulnerable to predatory practices will need the increased vigilant support of their confidants. We will continue to emphasize this part of our information-only practice and look forward to a healthy discussion in the forums. Advocates for the Obama administration rule contended that investor losses absent the rule reached $17 billion annually.