Court Strikes Down the DOL’s Fiduciary Rule. Should this Matter to You?


On March 15, 2018, a federal appeals court based in Dallas, TX struck down the U.S. Department of Labor’s (DOL) so-called “Fiduciary Rule” in the ongoing war waging within the financial services industry for the past two years.  This Fiduciary Rule would have required any financial advisor providing investment recommendations relating to IRAs to act as a “fiduciary” which, in general, means that the advisor’s recommendation must be in the client’s best interest.  You may be saying “well, I thought my advisor was always acting in my best interest.”   Unfortunately this is very seldom the case.  As Mark Kohler notes in “The Business Owner’s Guide to Financial Freedom,” only about 1.6% of all financial advisors in the country are Investment Advisor Representatives that are required by law to make recommendations in your best interest.   If you have ever received investment recommendations from your bank, or from one of the big box brokerage firms, or from most institutional financial services companies, chances are the advisor who provide the recommendation was not required by law to act in your best interest.
The concept of a “fiduciary” dates all the way back to Roman civilization and traditionally referred to a relationship of trust, confidence, honesty and integrity.  The idea is that someone who is acting as an agent should be acting in your best interest of the principal.  Acting in your best interest as a fiduciary is commonplace in many traditional professions such as law or accounting, or when you are operating in a capacity as a “trustee,”  but the same is not necessarily true in the financial services industry.   Beginning  in the 1940s, the law created a distinction between investment advisors, who provided investment advice for a fee and were required to act as a fiduciary, and others including broker-dealers, insurance companies, banks, etc. who merely sold financial products (i.e. salespersons) and were paid a commission on their sales.  In the earlier years, it was easier to tell the difference between an “investment advisor” and a “stockbroker” based on the titles that they used.  However, with the advent of discount brokerages as well as the internet, the demand for the traditional “stockbroker” plummeted and so those in the financial services industry who were not investment advisors ditched the “stockbroker” title and began marketing themselves different titles like “financial planner,” “financial advisor,” or “wealth manager.”  Many consumers assume from these titles that they are obligated to act in your best interest, but most often that is not the case.
At this time, only advisors who are licensed as Investment Advisor Representative (IAR) who works for a Registered Investment Advisory firm (RIA) are legally required to provide recommendations that are in your best interest (i.e. the fiduciary standard).  All other individuals are bound only to the “suitability” standard which generally means they can recommend the investment so long as they believe you can sustain the losses if the investment goes south.   Under the suitability standard, the advisor is not required to consider factors such as your investment goals, risk tolerance, or the fees and commissions that the investment will generate for the advisor or the company.    Perhaps most importantly, such advisor is also not required to disclose whether there are any conflicts of interest arising from the advice that is given.    If the investment being offered to you had extraordinarily high commissions or fees, or if the successful sale of the product would qualify the advisor to an all-expense paid trip to the Caribbean, wouldn’t this be information that you would want to know in deciding whether to invest?
Beginning in 2016, the DOL began the process of implementing regulations that would have required all advisors making recommendations for IRAs (not just RIAs) to operate under the fiduciary standard (Note this rule only applied to IRAs and not investment accounts generally).   The decision was met with considerable opposition from within the financial services industry and there are several major cases pending on the issue in addition to the case in Dallas.  Major institutional players like MetLife, Edward Jones, AIG and Merrill Lynch began making changes to the types of financial products and services that they offered in anticipation of implementation of this rule (What?  You mean some of their products they sold were not in my best interest??).  However, with this recent decision by the 5th Circuit Court in Texas, it is unclear what will become of this movement towards implementing a fiduciary standard for all advisors in the financial services industry.
The takeaway from this turn of events is that is your responsibility to understand the role and relationships you have with your financial advisors.  You should not merely assume, for example from their title, or their experience, or because you have a long time relationship with the company they work for, that your advisor has your best interests in mind when making a recommendation for an investment.  This is not to say that you should never work with, for example, a commission based insurance salesperson or securities broker as there certainly are instances where investing in particular product may be advantageous and there are certainly investors who would rather pay a 1 time commission rather than be on a continuous fee based structure.  What is important is to have as much information as you can get about the investment, as well as the advisor, in order to make an informed decision about the investment.  Some of the issues that you should understand include the following:

  1. What type of licenses or certifications to they have? This type of information can be typically found by researching online such as using FINRA’s broker check and while you are there, check to see if the advisor has a “Form ADV” on file.  Form ADV is a form that Investment Advisors are required to file with the SEC and has information on the history (or lack thereof) of the advisor.  For insurance products, is the advisor licensed by the state?   If the advisor claims they have a certification, contact the agency providing the certification to verify.   Don’t be persuaded merely by fancy titles.
  2. How is the advisor compensated? Are they paid a fee only and therefore they have no particular financial incentive to sell you any product, or is their compensation dependent on the product that they sell to you?  If the latter, then most likely they can only offer the products that their company offers which may have high fees, high commissions, and may not be what is right to achieve your financial goals.  They should be providing you this information about their compensation in writing.
  3. Understand the product or service you are buying and read the fine print. You should never invest in a product that you don’t understand and if you find that the details are hard to decipher, get help!  As with any professional advice, it is usually a good idea to get a second opinion.

Although the DOL’s defeat at the 5th Circuit Court of Appeals in Dallas could signal the end of the movement to expand the fiduciary rule in the financial services industry, you can protect yourself regardless of what the DOL, Congress, or the courts do by understanding the rules and choosing your investments and investment advisor carefully.