Last year I wrote about a new regulation introduced by the Department of Labor (DOL) referred to as The Fiduciary Rule. In its simplest form, the rule was to require every financial advisor to act in their clients’ best interest. The rule pertained only to retirement plan participants and IRA investors, although the intent was to expand this regulation to cover all investors over time.
While this sounds simple and logical, there has been push back from lobbyists representing major firms who do not espouse this basic tenet. Organizations that manufacture products, sell propriety investments, and work on a commission basis do not want to be held in a fiduciary capacity due to the inherent conflicts of interest. The regulation put strict disclosure procedures in place when their representatives (referred to as Registered Representatives) use these proprietary products. The process is known as Best Interest in Contract Exemption (BICE).
Apparently, the push back was effective. Earlier this month, the Fifth Circuit Court of Appeals issued a 2-1 decision “vacating” the DOL Fiduciary Rule. The decision is sweeping as it rejects the regulation, and if it becomes final, the DOL will not be enforcing the 2016 Fiduciary Rule. Registered Representatives will be governed by the more relaxed standard of “Suitability”. Suitability requires that the representative “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer’s investment profile.” Missing from this language is the requirement that the representative act in the best interest of the customer, putting the investor’s interest above their own.
The rejection of the fiduciary rule across all advisors is a major setback for the investing public. Requiring that an advisor put the clients’ interests first must be the minimum standard when dealing with the public. Education, experience, and adhering to a code of ethics (all standards of the CERTIFIED FINANCIAL PLANNERTM designation), should be basic requirements of those giving financial and investment advice.
The good news is that Registered Investment Advisors are held to the higher fiduciary standard, so we will continue to differentiate ourselves and provide objective, fiduciary advice to our clients. As I mentioned earlier, it’s simple – always put the clients’ interest first.