The Department of Labor’s groundbreaking new Fiduciary Rule may change the legal responsibilities of advisors who sell financial products for consumers’ retirement accounts.
Financial services industry pundits aren’t sure whether the new rule is a giant step in the right direction or a successful dodging of a bullet by Wall Street.
The original intent was to require those selling financial products for retirement plans to act as fiduciaries —advisors required to put clients’ interests ahead of their own. One proposed provision was a “restricted asset list” which would have banned the sale of high-commission products like private REITs and annuities to IRAs and other retirement plans. Wall Street brokers were “expecting a punch in the face that would force a dramatic overhaul of how they dealt with their customers,” notes Joshua Brown, CEO of Ritholtz Wealth Management, in an April 6 article at Fortune.com.
As adopted, the final rule allows financial salespeople to still sell all the controversial illiquid high-commissioned products they currently sell, as long as the brokerage firm can document the product is in the client’s best interest. Brown says this amounts to a “love tap.”
Bob Veres, editor of Inside Information, sees the new Fiduciary Rule as still a big win for consumers and fiduciary advisors. In an April 8 column, he writes, “professional financial planners and advisors have achieved a victory, and the Wall Street and independent broker-dealer service models have been dealt a blow.”
Veres argues that the new fiduciary duty to act in the client’s best interest will by itself preclude financial salespeople from justifying the sale of high-commissioned products in IRAs. He also points out that salespeople will no longer be allowed to receive “fat commissions” for recommending annuities and non-traded REITS, and therefore are unlikely to recommend these products.
Financial planner and writer Michael Kitces suggests the DOL’s concession allowing the current questionable financial products to still be purchased by IRAs may be “a brilliantly executed strategy of conceding to the financial services industry the exact parts that didn’t actually matter in the long run, . . . yet keeping the key components that mattered the most,” the fiduciary duty to the client.
Brown believes salespeople will continue recommending higher-cost products “so long as a justification can be made for their being recommended (quality, performance, etc.).” He adds, “Advisors will still be able to sell the proprietary products of their own firm so long as they can enunciate the reason why these products are in their customers’ “best interests” – a hurdle whose height will probably be adjusted on a case-by-case basis as no one really knows what it means yet.”
Kitces contends the new law will ultimately give consumers the power through the courts to define what is and isn’t in their best interests. He points out, “In other words, while the DOL fiduciary rule didn’t outright regulate what Wall Street can and cannot do, it did change the legal standard by which those actions will be judged and ensure that eventually the courts will have the opportunity to rule on these fiduciary conflicts.”
While the new rule only applies to retirement assets, Veres and Brown see it as a step toward requiring a fiduciary standard for all investment advice. I tend to agree.
Since so many small investors hold retirement accounts, applying a fiduciary standard to those investments may help more consumers understand the difference between fiduciary advisors and product salespeople. As the industry moves toward full compliance with the rule by the April 2017 deadline, we may see an increase in consumer demand for financial advisors who put clients’ interests first.