For years I have bemoaned the fact that many financial professionals were not always required to act in the best interest of their clients, i.e., they were not required to adhere to the fiduciary standard of care.
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Instead, brokers and insurance reps who sold securities products were held to a lower standard of care called “suitability,” which meant that what they recommended had to clear the low bar of what is suitable, though not necessarily in your best interest.
Recently, there was progress towards requiring financial service representatives to adopt the fiduciary standard.
The Department of Labor (DOL) issued its Retirement Security Rule, updating the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA, which is the law that sets minimum standards for private industry retirement and health plans), and the Internal Revenue Code.
The process started in 2010, when government officials began studying the fiduciary issue. The DOL and Securities and Exchange Commission (SEC) pursued fiduciary concurrently, which led to different outcomes.
In 2016, the DOL issued a broad rule, which would have required professionals who provided retirement investment recommendations or solicitations, to act in the best interest of their clients. However, in 2018, the Court of Appeals for the Fifth Circuit overturned the DOL Fiduciary Rule, saying that the Department exceeded its authority.
The SEC created a less onerous variation with Regulation Best Interest (Reg BI) under the Securities Exchange Act of 1934. After industry pushback and negotiation with regulators, Reg BI went into effect on June 30, 2020.
It established a higher standard of conduct for investment professionals “when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.”
For its part, the Certified Financial Planner Board of Standards announced a change to its Code of Ethics and Standards of Conduct in 2019, mandating that CFP® professionals must act in the best interest of the client at all times when providing financial advice.
OK, back to the new rule…
The 2024 DOL version updates the definition of a fiduciary and would apply it “when trusted financial services providers give compensated investment advice to retirement plan participants, individual retirement account owners and plan officials responsible for administering plans and managing their assets.”
It is supposed to take effect on Sept. 23, 2024, but like its predecessor in 2016, it is likely to face industry pushback and another legal challenge.
Within hours of the DOL’s new rule announcement, Wayne Chopus, President and CEO of the Insured Retirement Institute, an insurance industry lobbying group chimed in.
“It appears that the regulation will make it much more expensive and difficult, if not impossible, for many consumers to access reliable professional assistance.” My translation: If this rule goes into effect, our members will not be able to sell people expensive and commission-laden retirement annuities.
Acting Labor Secretary Julie Su notes that the new rule attempts to protect “retirement investors from improper investment recommendations and harmful conflicts of interest.” In fact, analysis by the Council of Economic Advisers of just one product — fixed index annuities — “suggests that conflicted advice could cost savers up to $5 billion per year.”
Regardless of the outcome of the new DOL fiduciary rule, you should be clear about whether or not the person providing you with financial advice on a retirement or investment account (or is trying to sell you an insurance product) is putting your best interest first.
To find out, just ask: “Are you held to the fiduciary standard?” If so, get this pledge in writing and make sure that it applies all of the time and to all accounts.
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Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.