Why the Fiduciary Rule Matters

In the first 100 days of the Trump administration, one of the main directives given to the transition team was to eliminate two regulations for every new government regulation passed. In addition, the administration used a rarely-utilized loophole known as the Congressional Review Act to target every amendment and regulation passed in the closing months of the Obama presidency.  One of the prime targets, the Fiduciary Rule, is a financial regulation intended to provide customers an extra measure of protection when they find a financial advisor, originally scheduled to go into effect in April.

Why was this law so controversial? For one, the financial industry has always preferred self-regulation to government involvement. But the Fiduciary Rule goes far beyond that in terms of customer assurance and transparency.

The core of the regulation is defining brokers, insurance agents, and retirement planners as “fiduciaries,” holding them to the same standards legally as financial advisors. A fiduciary is legally obligated to put their clients’ interests in front of their own, and to avoid conflicts of interest in the selection of investments.  This requires fiduciary accountability, rather than the mere suitability required to sell securities and investments under the previous system — not only must the investment be designed to meet the client’s needs, but the broker also must not be subject to any sales incentives, such as commissions, to sell that particular investment.

The legal definition of financial advice also becomes much broader under the Fiduciary Rule. While (in legal terms, anyway) financial advice previously only included investment guidance specifically paid for hourly or as a percentage of the total investment, certain sales communications with brokers and agents are now explicitly included as fiduciary advice, any time the financial professional recommends a specific investment. (However, if the client suggests the specific investment, it does not necessarily constitute financial advice).

Financial education, teaching economic and market concepts without recommending specific investment options, also does not constitute financial advice, and will continue not to even after the Fiduciary Rule takes effect.  Neither do interactive tools or statistical information where clients themselves can develop ranked lists of investments (for example, S&P 500 top gainers, or the top performing emerging markets mutual funds year to date) based only on statistics rather than the advisor’s personal or business opinions.

While working on commission, or even taking commission to sell specific investments, will not be forbidden, your financial advisor will now need to provide a government-mandated disclosure, a BICE (Best Interest Contract Exemption) informing you of any commissions they are subject to, as well as any fees and compensation paid to the advisor from your investment.  This added transparency lets you know whether your advisor really believes in the investment you’re about to buy into, or whether it’s just a means to an end: a bigger bonus at the end of the year.

Backed by investment firms and free-market lobbyists, President Trump attempted to repeal the Fiduciary Rule with an executive order requiring a legal review of the measure. Last week, the rule withstood yet another court challenge, the final appeal for the core principles of the regulation. According to Secretary of Labor Alexander Acosta, the Obama administration’s estimate that it would save investors $15 billion per year in excess fees and commissions, and increase the rate of return on American retirement plans by up to a percentage point, were both fundamentally accurate, and so beneficial to the consumer that it would be irresponsible to repeal or even further delay the act.

With the threat of repeal past, the Fiduciary Rule is now scheduled to take effect on June 9 of this year, bringing with it sweeping changes in the financial sales industry.

For more detailed information about the effects of the Fiduciary Rule, read this FAQ provided by the Department of Labor.