Denial is Not an Option: Why Savvy Investment Advisors will Accept Fiduciary Status

by Carol Buckmann

carol@cohenbuckmann.com

You can’t put the genie back in the bottle, although brokers and non-fiduciary advisers are trying to do so in their challenges to the new fiduciary rule.  

As has been widely reported, there are several pending court challenges to the Department of Labor’s new guidance in a last ditch effort to avoid compliance.  You might think that the financial services industry would find it uncomfortable to be seeking to enjoin a rule requiring them to put their client’s interest before their own (it is, after all, the client’s money), but apparently not.  These lawsuits have created some unfortunate confusion about the vulnerability of the final rule.  While it is never possible to predict with certainty what particular courts will do, here are some reasons the fiduciary rule should be upheld and the pending challenges dismissed:

  • The lawsuits claim that the regulations were not subject to sufficient public comment, but there isn’t another set of regulations issued in recent memory that was subject to so many hearings and got so many public comments.  The Department of Labor clearly took those comments into account, as is evident from a comparison of the different versions of the regulations.
  • The lawsuits claim that the Department of Labor has no authority to define “investment advice”, but the agency clearly has authority to interpret Section 3(21) of ERISA in the same way that the Internal Revenue Service issues regulations and rulings interpreting sections of the Internal Revenue Code.  And Reorganization Plan No. 4 transferred to the Department of Labor the authority to define prohibited transactions involving individual retirement accounts, though this wasn’t statutory.    
  • Brokers claim that if the regulations become effective, many will leave the market and smaller accounts will no longer have access to investment advice.  In fact, they convinced some small plan sponsors to testify and comment that the new rules would require them to pay more for advice or forego advice completely.  But is this correct, and can they really claim any damages? Leaving aside the question of whether conflicted advice is better than no advice, as an amicus brief in the Texas suit points out, there are many advisers who are already subject to the fiduciary standard, and they are doing just fine.  In the U.K., similar predictions of an exodus from the market were made when commissions were prohibited across-the-board, and some brokers did leave the market, but strengthening protections for investors did not cause brokers to abandon it.  Life and the investment business went on.  Retirement accounts potentially represent trillions of dollars in business.  It will not be easy to walk away from that.

A key point sometimes lost in these discussions is that in some ways, the genie is already out of the bottle.  The battle over these regulations has focused public attention on the fact that non-fiduciary advisers are permitted to put their own interests first, something that many relatively unsophisticated plan sponsors and IRA holders had not understood.  Some undoubtedly still don’t understand this, but the New York Times, the Wall Street Journal and USA Today, among others, have been writing about this issue for some time, and this uninformed group is getting smaller.  

Smart plan fiduciaries already insist that their advisers acknowledge fiduciary status, and their ranks are growing.  A just issued survey by Fidelity Investments found that 69% of plan sponsors-a new high-now rank an adviser’s willingness to assume fiduciary responsibility as important.  

A movement towards level fees and more transparency began before the final rule was issued as a result of new disclosure requirements for service provider compensation and the many lawsuits filed challenging 401(k) plan investments and fees.  These developments also led prudent plan fiduciaries to conclude that the stakes were too high to make decisions without input from professionals who will assume co-fiduciary responsibility.  Even if pension professionals and court watchers are surprised and the challengers prevail in overturning the regulations, there is no going back to the investment landscape as it existed before.  Savvy non-fiduciary advisers and brokers will adjust their practices and move forward.