DOL's Fiduciary Rule Officially Shelved

The Department of Labor's (DOL) fiduciary rule has finally breathed its last. In a June 21st decision, the 5th Circuit Court of Appeals issued an order vacating the rule

The rule, intended to impose a fiduciary standard on financial advisors and insurance companies in their handling of Employee Retirement Income Security Act (ERISA) and individual retirement accounts, had become the subject of harsh scrutiny over the last two years. Leading the opposition were various lobby groups, including the U.S. Chamber of Commerce, the American Council of Life Insurers and the Indexed Annuity Leadership Council.

The court agreed with certain objections raised by those groups, which included a challenge to the rule's consistency with governing statutes and the DOL's authority to regulate financial services and providers. In its final order, the court wrote, "Finding merit in several of these objections, we VACATE the Rule." 

Doomed to Fail

The end of the fiduciary rule may not be all that surprising, given the amount of backlash the rule generated. Ryan Brown, attorney and partner at CR Meyers in the Detroit area, says government overreach led to the rule's ultimate demise.

"The Obama administration and its Department of Labor performed an entire circus act of both administrative and political somersaults to push through its final rule," Brown says. They were no match, however, for its opponents who, "... presented strong legal arguments against it, causing the Fifth Circuit to ultimately rule the way it did."

Tony Drake, certified financial planner and CEO and founder of Drake & Associates in Waukesha, Wisconsin, says the fiduciary rule suffered because it was poorly defined. (Read more: Meeting Your Fiduciary Responsibility.)

"Under the rule, advisors would be required to act in their clients' best interest and charge a reasonable fee," Drake says. "The lack of definition gave investors the right to sue their advisors if they didn't believe those standards were being followed."

Drake says the rule's complexity and the potential for opening the door to litigious action largely contributed to its failure, and, "... the industry that stood to benefit most was the legal industry."

A desire on Wall Street to continue with business as usual was also a factor in the rule's death, says Jim Davis, president, board of directors at Alliance of Comprehensive Financial Planners in Wilmington, North Carolina.

"Wall Street has deep pockets in place to protect their interests; unfortunately not so for the consumer," Davis says. "The large financial institutions that do not have a fiduciary standard would stand to lose a large chunk of their business if the fiduciary rule were in place."

What's Next for Advisors, Investors?

Despite the rule's failure, there may be a silver lining.

"The positives are already being felt. The investing consumer is a more aware consumer and can better look out for themselves," says Y. David Scharf, partner, Morrison Cohen LLP in New York, adding that investors are in a position to ask the right questions to ensure that the advice they're receiving isn't tainted by self-interest.

Drake says conversations with clients regarding fiduciary standards have become more common. He also notes that many financial firms changed the way they work with clients, eliminating expensive products and adopting policies to benefit investors, in anticipation of the rule's implementation.

"Many of the big and reputable investment banks and advisors have said they will keep their fiduciary rule standard for the advice they provide, even though it can no longer be enforced, as a way to promote customer confidence," Scharf says.

There also remains the possibility that similar guidelines could be revived by the Department of Labor or the U.S. Securities and Exchange Commission (SEC). The Department of Labor did not petition the Supreme Court by its June 15 deadline to challenge the Court of Appeals' earlier ruling, but another group could take up the reins. 

"It's clear that Trump's DOL will not pursue anything like this," Brown says, noting that, "... the federal government has learned its lesson that it should allow its agencies to stick in their lanes and regulate what they're permitted to regulate, respectively."

What that picture looks like, says Brown, is FINRA proposing regulations for registered representatives and broker dealers, the SEC proposing regulations for Registered Investment Advisors (RIA) and investment advisor representatives, and the National Association of Insurance Commissioners developing a regulatory model for individual states covering insurance producers and the products they sell. (Read more: SEC Alt-Fiduciary Rule: "Regulation Best Interest".)

Davis says in the meantime, investors must perform their due diligence if and when they engage a financial advisor to understand how that advisor is compensated. They also need to understand, "... that there are many financial advisors that act as a fiduciary and avoid any conflicts of interest that could arise."

The Bottom Line

The fiduciary rule has reached the end of the road but the driving principle behind it remains firm: "The key takeaway for financial professionals is that the concept of acting in the best interest of the client is not going away, nor should it," Brown says.

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