The ‘Fiduciary Rule’ May Sound Boring, But Its Collapse Threatens Your Retirement
Among all the financial reforms launched during the Obama administration, the fiduciary rule may have been the most important to ordinary investors. Issued by the Department of Labor in 2016, the rule required brokers working with retirement accounts to put clients’ interests ahead of their own—for example, by recommending an annuity that was better for the client rather than one from a company that paid the broker a bigger commission. The regulation was hailed as an historic win by consumer advocates, and the financial-services industry began remaking many of its products and pay structures to comply.
Now the regulation is all but dead. In March a federal appeals court struck it down, and the Trump administration has not appealed the ruling. Where does that leave retirement investors? The outlook is anything but clear.
In April the Securities and Exchange Commission released its own plan for investor protection. In a proposed rule that runs hundreds of pages, the agency says it wants brokers “to act in the best interest of the retail customer” but adds, “We are not proposing to define ‘best interest’ at this time.” Instead, the agency lists “obligations” of brokers to ensure they don’t place their own interests before those of their clients and says financial companies must “establish, maintain and enforce policies” that are designed to spot and mitigate conflicts. “We don’t know what they mean by ‘best interest,’ ” says Barbara Roper, director of investor protection at the Consumer Federation of America. “And that is a problem they need to fix because this regulation, as drafted, depending on how it’s interpreted, could be anything from the status quo to a significant improvement in investor protection. And if it’s vague, it’s going to be difficult to enforce.”
The advent of the fiduciary rule led the industry to make changes that may not be reversed, according to Aron Szapiro, Morningstar Inc.’s director for policy research. After the Labor Department’s announcement in 2016, financial companies began moving to comply with it. Bank of America Corp.’s Merrill Lynch stopped offering many commission-based retirement accounts in favor of ones that charge fees. “At the very least, from a PR standpoint, it would be difficult to go back to the old ways of doing business,” says Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc. “It just looks bad.”
Also, companies such as Primerica Inc. and Ameriprise Financial Inc. poured millions of dollars into training employees on the new rules, revising procedures and documents. “I don’t think some firms are particularly interested in going back and re-creating a new compliance regime to somehow take advantage of the absence of the fiduciary rule,” says Gardner.
While the rules remain uncertain, the debate has heightened public awareness of the investor-adviser relationship. The word “fiduciary” even seeped into popular culture, with comedian John Oliver devoting a segment of his HBO show to the fiduciary rule. Meanwhile, investors have to take the initiative, says Christine Lazaro, professor of clinical legal education at St. John’s University School of Law. They should “be comfortable asking more questions and not feel like they’re inadequate in some way because they don’t already know this information,” she says. “Have that conversation, and ask about anything that you don’t understand.”