On March 15, 2018, the 5th U.S. Circuit Court of Appeals struck down the fiduciary rule. Former President Barrack Obama had initially called on the Department of Labor three years earlier to revise the rules and requirements for retirement advisors to “put the best interests of their clients above their own financial interests.” Fiduciary advisors already uphold this standard by avoiding conflicts of interest from commissions, referral fees, kickbacks and other hidden sources of payment. However, this begged many clients to ask: “Can you trust your financial advisor?” If you’re looking for a financial advisor, SmartAsset’s free tool can match you with options who serve your area.
What Happened to the Fiduciary Rule?
Back in 2015, former President Barack Obama proposed the fiduciary rule. This rule was part of a financial industry reform aimed at making it easier for you to know whether you can trust your financial advisor.
The rule would have required all financial advisors to have a “fiduciary duty” to their clients. In essence, this is a duty to protect their clients’ money and to put their clients’ interests ahead of their own. Critics say this change likely would have resulted in a drop in high-fee, low-return investments, and supporters said it would have undoubtedly benefited clients.
But shortly after President Donald Trump took office, he put the Obama-era proposal on ice. On April 4, 2017, the U.S. Department of Labor first asked for a 60-day extension following a Trump memorandum that “directed the department to examine the fiduciary rule to ensure that it does not adversely affect the ability of Americans to gain access to retirement information and financial advice.”
This was followed by an 18-month extension, which gave firms until July 1, 2019 more time to make necessary adjustments. And then finally, on March 15, 2018, the 5th U.S. Circuit Court of Appeals ruled in a 2-1 vote that the Labor Department had overstepped its authority, which officially vacated the rule and effectively killed it.
Note that a new investment advice rule was set to take effect on December 22, 2021 for 401(k) participants and similar retirement plans.
This new rule expands the definition of fiduciary advice and exempts financial fiduciaries from the Employee Retirement Income Security Act (ERISA), letting them get paid for advice on rollovers by third parties as long as they act in the savers’ best interest.
While other exemptions have been made, parts of this regulation are subject to full enforcement since February 1, 2022.
What Did the Fiduciary Rule Aim to Do?
The proposed reform would have imposed a fiduciary duty on any advisors who handle retirement accounts or sell investments for retirement accounts. The rule categorizes traditional and Roth IRAs, 401(k)s and health savings accounts as retirement accounts.
This legislation would have applied mostly to stockbrokers and others who sell commission-based investment vehicles. There is currently no rule in place to keep certain financial professionals from putting their own interests ahead of their clients’ retirement prospects.
While SEC-registered financial advisers already have a fiduciary duty to their clients, those who aren’t registered with the SEC do not. Broker-dealers, stockbrokers and insurance agents are only required to fulfill a suitability obligation. This means they must offer suitable recommendations to their clients, but they aren’t obligated to put their clients’ interests first.
The fiduciary rule’s changes were proposed on the heels of a 2015 study by the White House Council of Economic Advisers that found that a segment of the country’s financial advisers were costing their clients billions. By pushing high-fee, low-return investments on their clients, these advisers pocketed an annual $17 billion that could have gone to clients’ retirement accounts.
Wall Street’s Objection to the Fiduciary Rule
The plan to eliminate the loopholes that allow for conflicts of interest between brokers and their clients provoked a predictable backlash. Under the fiduciary rule, firms that thrive on the high-fee commission model would have had to change their ways and compete with the low-cost index funds of the world.
The Department of Labor estimated in April 2016 that the rule could have cost firms up to $31.5 billion over 10 years: “The Department estimates that the cost to comply with the final rule and exemptions will be between $10.0 billion and $31.5 billion over 10 years with a primary estimate of $16.1 billion, mostly reflecting the cost incurred by affected fiduciary advisers to satisfy relevant consumer-protective PTE conditions.”
The industry argued that the rule could have opened up the floodgates for lawsuits, drove up costs for consumers and caused clients with limited savings to be dropped by firms. In addition, the industry, which argued that the rule was complex and costly, contended that it may have also limited clients’ investment options.
How to Tell If You Can Trust Your Financial Advisor
Since the Obama-era fiduciary rule was effectively killed in 2018, what can you do in the meantime? One easy way to ensure you’re working with a trustworthy financial advisor is to choose a professional who is already required to act as a fiduciary.
Financial advisors who are registered with the SEC are required to have a fiduciary duty to their clients. It’s those who aren’t registered with the SEC, particularly stockbrokers, that are not required to be fiduciaries.
Also be cognizant of advisors’ certifications. An advisor who is a certified financial planner (CFP), for instance, must abide by the fiduciary standard.
Finally, if you’re unsure, the easiest way to find out if an advisor is a fiduciary is to ask directly. An advisor should be able to provide you with a fiduciary oath that they’ve taken.
The fiduciary rule was effectively killed in 2018. That means consumers will have to keep taking their finances into their own hands, do their homework and monitor their accounts. Check your annual returns and analyze the fees you are paying. If you’re not happy with what you see, it may be time to start shopping around.
Tips for Vetting a Financial Advisor
- In order to vet a financial advisor, you’ll need to find one first. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Do your research. Look at a financial advisor’s qualifications. Find out if he or she is registered with either the SEC or the state securities agency. Check to see if the firm or advisor has any disclosures.
- Make sure you understand the fees. Ask for a full disclosure of the financial advisor’s fees. This is also available on the firm’s Form ADV (SEC-filed paperwork).
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