If you like riddles, news headlines provide great fodder for deep thinking. Here is a good one: What has been in the news since 2010, has been tossed around like a hot potato and is intended to stop money from unwittingly slipping through your wallet? Give up?
It’s the fiduciary rule.
If that doesn’t ring much of a bell, you’re not alone. Riddles aside, the general intent of the fiduciary rule is to protect clients from biased, conflicted advice and hidden fees. It was first proposed by the Obama administration in 2010 and then established by the Department of Labor in 2016. As of March 19, 2018, the Fifth Circuit Court of Appeals in New Orleans, in a 2-1 decision, chose to vacate the fiduciary rule due to “unreasonableness.”
Let’s examine some of the headlines during the time the rule was being developed and implemented:
- The SEC required Barclays Capital to refund overcharges and unnecessary fees to the tune of nearly $100 million in May of 2017.
- On Sept. 14, 2017, the Securities and Exchange Commission (SEC) charged SunTrust Bank’s investment services division with collecting more than $1 million in easily avoidable client fees due to poor recommendations for more expensive share classes. The bank refunded the fees and paid an equal penalty to settle with the SEC.
- In May 2016, three different American International Group firms settled with the SEC, based on collecting about $2 million in superfluous fees from clients.
- Earlier this year, Voya Financial Inc. paid $3.6 million to settle charges related to failure to disclose conflicts of interest and misleading investors in mutual funds.
- Finally, Ameriprise Financial Services was also caught by the SEC for engaging in share class infractions – customers paid more than $1.7 million in sales charges, fees and expenses based on less-than-upfront sales practices.
Clearly, all these actions hurt clients, cost them money and were hardly in the client’s best interest.
As you may know, a fiduciary is required to act solely in the interest of clients and beneficiaries, which seems pretty logical. However, not every financial services company and advisor acts in the client’s best interest: For example, unknowingly to you, some companies/advisors recommend funds that pay more in return – they can also make money from unnecessary marketing fees (12b-1) and sales charges. The fiduciary rule, then, elevated all financial professionals who handled retirement planning, IRA accounts or anything related to the level of a fiduciary, chiefly impacting those who work on commission.
Prior to the fiduciary rule, there was a “suitability” standard, which only required brokers to meet clients’ needs and objectives, but not necessarily to put clients’ best interests first.
Tick Tock: A Timeline on the Fiduciary Rule
The initial 2010 rule was scrapped following industry uproar, but it resurfaced a few years later. The following timeline (click graphic to enlarge) will help you better understand where the rule has been and where it is potentially going:
As of now, the rule is in limbo–it may land in the lap of the Supreme Court–assuming the Labor Department continues to advocate for it – or the Fifth Circuit Court of Appeals could ask all its judges to review it further. Likewise, the Department of Labor could accept the ruling and decide to soften the language of the fiduciary rule.
While advisors in Texas, Louisiana and Mississippi do not currently have to follow the rule, experts believe that it still holds true in other areas – for now.
Whose Thumbs are Up and Whose are Down?
Who loves the fiduciary rule and who is desperately trying to stop it? Investors should pay close attention to these friends and foes.
Organizations that already act as fiduciaries, such as Independence Wealth Advisors and Safe Harbor Partners, appreciate the transparency this rule offers and urge all advisors to simply act in accordance with their clients’ best interests.
Other proponents include the Financial Planning Association, the National Association of Personal Financial Advisors and the Certified Financial Planning Board, among others.
However, many organizations oppose the rule. The lengthy list includes: Vanguard and BlackRock (the two largest asset managers in the world), the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Financial Services Roundtable, the Insured Retirement Institute and the Financial Services Institute, for starters.
Many independent brokers and insurance agents are also less than thrilled with the idea of becoming a fiduciary and having to offer impartial advice or get clients to sign commission exemptions.
Pricing models significantly impact potential conflicts of interests. Fee-only firms use a fee-for-service model, and the transparent costs are listed on each statement. On the other hand, brokers often receive compensation from product sales, where the fee is baked into the product, making it very difficult for clients to understand what and how they are paying. Few clients understand or even pay attention to share classes and may unwittingly pay high fees for holding onto investments, buying and selling, and pretty much everything in between.
Do Your Research. Ask Questions. Expect Answers.
No matter what happens next, you have a choice. You can choose transparency. You can choose fiduciary care. You can choose a smarter financial future.
Ask if your advisor is a fiduciary, how he or she is paid, and learn more about your advisor’s background and qualifications. When you take the time to vet your financial advisor, you can then make an informed and financially sound decision that may benefit you and your beneficiaries for years to come.
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