Can the Fiduciary Rule Be Saved?

Since it was first proposed in 2010, the Department of Labor's (DOL) fiduciary rule has been on a long and winding journey, and it may be coming to an end. While the rule was intended to close a loophole in the definition of “fiduciary,” it's been met with resistance from the financial planning sector. (See: DOL Fiduciary Rule Explained)

The loophole, located in the Employment Retirement Income Security Act (ERISA), allowed personalized advice to be rendered by most broker-dealer and insurance representatives without fiduciary accountability, says Blaine Aikin, executive chairman at Fi360 in Pittsburgh, Pennsylvania: "Investors routinely believed, and were led to believe, that they were getting objective, professional advice when in fact, the advice provider was acting as a sales representative of their employer."

The fiduciary rule had positive implications for retirement savers because it enforced new accountability standards for retirement plan advisors. However, according to Aikin, “Abruptly changing business practices to avoid conflicts of interest and meet higher proficiency standards isn’t easy, especially for large firms.

It takes time and money to do that, and it disrupts the profitability model of a sales-driven culture to shift to a professional advice paradigm.”

Arian Vojdani, investment strategist at MV Financial in Bethesda, Maryland, says political and financial influence has changed the tide of opinion. At the center of the issue is the rule's potential to significantly alter the revenue model of financial advisors who don't currently follow a fiduciary standard. Ultimately, brokers could see their earning potential shrink if they're no longer able to push high-commission investments that aren't in their clients' best interest: “Many of those who may be pushing back at the rule may either be, or have ties to, interested parties who would suffer at the passing of the rule.”

The rule has been delayed numerous times, with full implementation now scheduled for June 2019, although recent federal court action threatens the rule’s survival.

In mid-March, the U.S. Fifth Circuit Court of Appeals vacated the DOL fiduciary rule in a 2-1 decision. The court ruled that by adopting this rule, the Labor Department had overstepped its authority under the Employment Retirement Income Security Act (ERISA). The Department of Labor had an opportunity to appeal the ruling but remained inert, allowing the deadline for appeals to pass. 

In early May, interest groups for business and financial services groups (the initial challengers of the rule) scored a victory after the Court of Appeals denied a motion by AARP and the state attorney generals of California, New York and Oregon to intervene in the case. The motion was deemed “unjustifiable” by the lobbyists, and the Court of Appeals agreed. Shortly after, the Department of Labor issued Field Assistance Bulletin No. 2018-02, a temporary enforcement policy for some provisions of the fiduciary rule. 

Aikin says the bulletin makes it possible for certain provisions of the fiduciary rule to continue: “In particular, the Best Interest Contract Exemption that was created by the rule allows firms to have certain compensation-related conflicts that were prohibited before the rule took effect, so long as they accept fiduciary accountability and adhere to ‘Impartial Conduct Standards’.”

Despite court opposition, the attorney generals of California, New York and Oregon subsequently filed an appeal with the Fifth Circuit, asking the court to reconsider its denial of their previous motion. Again, the Fifth Court firmly rejected this appeal. 

Aikin says the rule will most likely be vacated by the court so that it effectively never existed. “The definitional loophole will be restored, and investors will once again have to do their homework to distinguish between fiduciary advisors and salespeople.” (See: Meeting Your Fiduciary Responsibility)

The Department of Labor can still appeal this case at the Supreme Court level, but the appeal would have to be made by June 13. This is a remote possibility at best, according to Aikin.

“In short, the fiduciary rule is dead,” says Ryan Brown, Chief Strategy Officer and Corporate Counsel at M&O Marketing in Southfield, Michigan. “Both the government and proponents of the Fiduciary Rule have virtually exhausted every avenue to revive it. But that’s not to say that the SEC, FINRA and/or the NAIC will not craft similar models.”

Vojdani says failure to revive the rule could put investors at risk. “If the rule can’t be resurrected, we’ll continue to see some brokers and advisors in the industry continue to work in a way or act on behalf of a client in ways that might not suit the client’s best interest.” He says the influence that lobbying groups were able to wield in federal court could hint at future problems to come in advancing consumer financial protections.

Lobby and interest groups have long demonstrated their power to influence movements within the court system. A study released in October 2017 found that corporations that fund lobbyists tend to have more favorable litigation outcomes than those that don't. The Supreme Court's 2010 decision in Citizens United vs. Federal Election Commission opened the door to allow corporations unlimited scope with regard to campaign financing and lobbyist funding. 

Aikin says the “Wall Street versus Main Street” dynamic that’s characterized in the regulatory debate is unfortunate, because, “... having elements of the financial services industry square off against consumer advocates overshadows the great work fiduciary advisors do on behalf of their clients.”

“The earlier decision to void the fiduciary rule was not only a step backwards for the industry, but an attack against the biggest benefit for America’s 75 million hard-working retirement savers,” says Joe Ziemer, vice president of communications for online investing platform Betterment.

There is, however, a silver lining of sorts associated with the ongoing debate about the fiduciary rule.

“Throughout the fight for the fiduciary rule, we’ve seen a positive evolution to financial services,” Ziemer says. There is, “... easier access to low-cost investments and heightened awareness of how financial providers are compensated.”

Brown says regardless of the outcome, the main takeaway from the fiduciary rule’s controversial history is an emphasis on disclosure and transparency between financial professionals and consumers. “When everything is out in the open, people have the capability to make the most rational, well-informed decisions.”

At this stage, the ball is firmly in the federal government’s court. Barring a Supreme Court action ahead of the June deadline, it appears that the fiduciary rule may have finally reached the end of the line.