More Muddy Water: What Kind of Advice Are you Getting?
You might have heard that the DOL’s fiduciary standard definition was recently struck down in court and reversed. The result? They ruled that the Labor Department overreached by requiring brokers and others handling investors’ retirement savings to act in clients’ best interest.
How you get your financial advise -- from a biased or unbiased financial representative -- just got muddier than ever.
Quick background: brokers are covered under the Suitability Standard. Investment advisors are covered under the Investment Advisory Act of 1940, which includes the Fiduciary Standard. Investment advisors are considered fiduciaries liable for breaches of fiduciary responsibility. They have to disclose conflicts of interest to clients and put their clients' interests ahead of their own. In short, broker’s don’t. The suitability standard says they must sell you something that works for your situation, but it’s ok if one of the solutions that works for you pays the registered representative more and they recommend that solution instead of the other. More here.
Back to DOL. DOL is charged with enforcing the Employee Retirement Income Security Act (ERISA). That's a huge, powerful law that covers benefits, including employer sponsored retirement plans. Without getting into too much detail, they sought to expand the definition of fiduciary under ERISA to put all professionals who oversee these types of plans and rollover IRAs under the same set of standards and rules -- the Fiduciary Rule. Many rejoiced. Many didn't. It was immediately challenged in court.
The vast majority of securities and financial firms bent over backwards to comply with DOL's rule, particularly in regard to overseeing IRA rollovers from employer sponsored retirement plans, and some of that framework still exists.
However, the rule now doesn’t exist. (But you can argue that the landscape of advice delivery has been permanently changed by the rule, so that's a plus.)
While many felt that DOL overreached their authority with their rule, it had the intent of helping investors. So what’s next in the world of figuring out what kind of advice you’re getting? And what parts of the law apply? Enter: the SEC’s proposed Best Interest Regulation.
At the National Association of Plan Advisors DC Fly-in, we heard SEC Commissioner Hester Peirce make comments on the SEC's Best Interest Rule (note: the word “fiduciary” never appears). Hester’s comments included that no one can agree on what the word “fiduciary” truly means, and she makes a decent point. Their job is rule-making and overseeing, and their interested is in being able to point to a set of criteria or rules to demonstrate a person acted within or outside of a definition of law. She also mentioned that being a fiduciary, generally meaning you must put the standards of your client above your own, already has a suitability overlay to it. Suitability has an easy checklist that goes with it. The Fiduciary Standard does not.
Probably the more important concern of Peirce's is that the label “fiduciary” shouldn’t be used as a way to bypass or dissuade an investor from asking more questions about their financial advisor, the services that will be provided, and the fees that will be charged in return. Point well taken here. As an advisor, I still need to demonstrate our value that we provide, no matter that we’re held to a higher standard than registered representatives.
The most disconcerting part of the SEC definition though, is that it’s for a broad definition of “retail customers.” Unfortunately, the SEC ends up including employer sponsored retirement plans in this same pool by not excluding the plans from their definition. As discussed before, advice given to a retirement plan is very different than advice given to an individual.
ERISA is already extremely specific in its definition of fiduciary. Perhaps the participants in the plan receiving advice may be differentiated, but it’s very clear that those who provide advice on employer sponsored retirement plans (and meet the five part test in ERISA) are most definitely fiduciaries and subject to that level of the law.
By NOT subjecting all financial advisors/representatives to the ERISA standard for ERISA covered plans, you end up with confusion and competing laws. This will be the subject of our comment letter to the SEC.
A subset of retirement plans covered under Best Interest may not be allowed to sue their financial advisor (registered representative) for wrongdoing and breach of fiduciary responsibility. Plans that are overseen by investment advisors would have a higher standard to answer to yet, unlike broker-dealers, wouldn't have the protection of arbitration. I’m not a fan of taking away the rights and protections of plan sponsors and participants, nor am I a fan of letting the courts decide how a regulation that should have been clearer should be interpreted.
Overall, the SEC is definitely making progress in improving the quality of advice that investors get. But, the devil is always in the details.