Last year the Department of Labor (DOL) issued a new ruling, that is currently scheduled to be phased in from April 10, 2017, through January 1, 2018, that expands the definition of “investment advice fiduciary” under the Employee Retirement Income Security Act of 1974.
Basically, this means that financial professionals (i.e. financial advisors) who either work with retirement plans or provide advice on retirement planning will now hold a fiduciary duty to their clients. This is the highest duty under the law and means that your financial advisor will be forced to put your financial interests first when selecting financial investments for you, even if their compensation suffers as a result.
But this is just the beginning of the story…
The Trump Administration has taken the first steps to Roll Back The Fiduciary Rule
On February 3rd, President Trump signed an Executive Order that gives power to the Secretary of Labor to rescind or revise the rule because it “may not be consistent with the policies of [the Trump] administration.”
The Executive Order directs the Department of Labor to review three criteria as they pertain to the Rule, including:
- “ Whether the anticipated applicability of the Fiduciary Duty Rule has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;”
- “Whether the anticipated applicability of the Fiduciary Duty Rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and”
- “Whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.”
If the DOL determines that any of the above criteria would apply, OR if the DOL concludes for any other reason that the Fiduciary Duty Rule is “inconsistent with” the priorities of the Trump Administration, then it may rescind or revise the Rule, as appropriate.
What Does This Executive Order Mean Practically?
Honestly? Not much.
That’s because many firms, including Morgan Stanley and LPL Financial have announced they will press forward with the work they have done to prepare for the implementation of this Rule. In other words, they understand that investors want more transparency and lower fees. And if that is what the market wants, that is what they will provide.
I meet with many financial advisors every week and my conversations with them have echoed similar sentiments in that they are moving forward with implementation of the rule, regardless of what the DOL ultimately decides.
My Opinion on The Fiduciary Duty Rule
I understand that many firms, regardless of what some may say publicly, still don’t want this regulation. They don’t want to be burdened with a Fiduciary Duty. They are scared that clients will run to low to cost index funds as soon as they realize how expensive some investment products can be.
This is a rule that will result in lost commissions for advisors and additional compliance expenses.
But unfortunately, I don’t feel sorry for the large brokerage firms. They have done a lot over the years to warrant further regulation. Anytime there is a financial crisis, you can point to the big banks and brokerages as part of the cause, while at the same time the largest producing advisors and executives are laughing straight to the bank – at the expense of their clients.
Listen, there are a lot of great advisors out there. And I’m doing my best to align my law practice with advisors that hold themselves to a higher standard.
So yes, I am in favor of a bit more oversight of the financial services industry. And the advisors that are pushing forward with more transparency regardless of what the DOL says are the advisors that I want my clients working with.
Therefore, it goes without saying that I believe holding financial advisors to a higher fiduciary duty with respect to their clients is a good idea.
So if you are looking for an advisor, or you currently have an advisor – be sure to ask them how their firm is implementing (or not implementing) the fiduciary duty rule into their practice and how it will affect you.
How an Estate Planning Attorney Can Help
Before law school, Cary Estate Planning Attorney James Hart worked in a financial services firm in Philadelphia and has previously held several securities licenses. As a result, Jim is uniquely qualified to discuss complex financial issues with clients and help them to understand the strategies that their financial advisor is employing for them.
If you have questions about your retirement portfolio in the context of your overall estate plan, please feel free to contact us at (919) 883-4861 or fill out our online contact form to schedule a wealth planning session.