For many years now, the Department of Labor has attempted to create a stronger fiduciary standard of care for a broader group of investment advice professionals. In essence, those individuals who provide investment advice must put their clients’ interests ahead of their own. (For more on this topic, see 5 Misconceptions About A Fiduciary)
The DOL, which initially said it would release its proposal in January, now said it could come in August. Now, that deadline is in question. The process has been ongoing since 2010. In the meantime, the financial industry is spending boatloads of money to keep that higher standard at bay. No one has seen the revised rules, however, so exactly what’s at stake not entirely known.
Pay is the Issue
The problem is that brokers aren’t necessarily required to act as a fiduciary, meaning to act in their clients’ best interest. This is especially true of commission-based financial advisers – rather than fee-based financial advisers – as they don’t get paid until they sell a product. The DOL has said that commissions won’t be outlawed, but that hasn’t kept the likes of the Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Institute from saying that a stronger fiduciary standard would make it harder for them to serve investors at the lower end of the wealth spectrum. (For related reading, see: Paying Your Investment Advisor: Fees or Commissions?)
The Current Law
As the DOL rule is written now, fiduciaries can’t be paid in a way that could pose a conflict of interest. But the compensation of insurance agents and brokers is based on commissions on product sales, which means they are incentivized to sell pricier products when a cheaper one might be a better fit.
And with revenue sharing, the funds of asset management companies that pay more to brokers for selling their products may be sold with greater frequency than less-profitable funds that could be a better match for a client.
The 2010 Dodd-Frank law gave the Securities and Exchange Commission the right to make brokers act as fiduciaries, but did not require any written rules. As it stands now, only investment advisers are held to a fiduciary standard; the bar is lower for brokers, as they only have to meet a suitability rule. (For related reading, see: Choosing A Financial Advisor: Suitability vs. Fiduciary Standards)
The Bottom Line
No fiduciary rule will stop all financial misdeeds, and abusive sales practices are the exception rather than the norm. But a heightened standard, if adopted, could go a long way toward reassuring investors that they are being treated fairly by their adviser. It could also make it easier to recover damages.