DOL Fiduciary Rule Is Long Overdue, CFP Board's Top Lawyer Says
CFP Board has been asked whether the rule (a) will negatively impact access to advice for moderate income households, (b) is unnecessary because of the passage of Regulation Best Interest and the National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation and (c) is the same as the rule that the Fifth Circuit vacated by a vote of 2-1 (every other court to have considered the issue upheld the prior rule). CFP Board’s answer to each of these questions is no.
Limiting access to “sales recommendations” that are not in the retirement investor’s best interest is a good outcome for retirement savers. Requiring financial professionals to provide retirement sales recommendations under a fiduciary standard will result in millions of Americans gaining access to retirement investment advice that is in their best interests. This is great news for less wealthy investors, who have much to lose from retirement investment recommendations that are not in their best interests.
There are substantial dollars at stake. Investments in fixed indexed annuities, which are not subject to a best interest standard, reached $559 billion in 2021. That’s a lot of money being invested without meaningful regulatory oversight.
There should be one standard for advice on retirement savings. Financial professionals making retirement savings recommendations should have to do so in their clients’ best interest, subject to a duty of care and duty of loyalty, regardless of whether the recommendations are about securities, insurance, real estate, commodities, cryptocurrencies or other investment property. However, existing best interest advice regulations, including the SEC’s Regulation Best Interest and the NAIC’s Model Regulation, fail to cover significant categories of retirement investment recommendations.
Regulation Best Interest and the NAIC Model Regulation do not apply to real estate, many insurance products, commodities, certificates of deposit, other bank products, certain cryptocurrencies, and recommendations to employers who sponsor 401(k) plans. Retirement investors need DOL’s proposed rule, which would apply to each of these categories of retirement investment advice.
DOL’s proposal is new and different from the 2016 rule. Notably, the DOL addressed the main concern raised by Judges Jones and Clement in the Fifth Circuit Court of Appeals’ 2-1 decision: that the 2016 fiduciary rule was overly broad because it applied even where an investor might not have placed their trust and confidence in the investment professional.
In response, the DOL narrowly tailored the scope of the definition in the new proposed rule to relationships of trust and confidence by limiting the definition’s application only to those recommendations that (1) consider the retirement investor’s particular needs or individual circumstances and (2) may be relied upon by the retirement investor as a basis for investment decisions that are in their best interest.
The proposed rule also does not require firms to execute contracts warranting compliance.
This addresses concerns expressed by Judges Jones and Clement about the 2016 fiduciary rule, which required firms to execute best interest contracts with warranties guaranteeing that they and their investment professionals would comply with certain protective conditions. This created an enforcement mechanism for harmed IRA investors, allowing them to sue directly for a firm’s breach of the warranties.
Anything else you’d like to point out about Labor’s plan?
The DOL has outlined a suitable framework for providing fiduciary advice across various business models and compensation methods, including commissions. Fiduciaries must offer prudent and loyal advice at reasonable fees, and their firms take meaningful steps to mitigate compensation conflicts through policies, procedures and periodic review.
At the same time, the DOL is closing regulatory gaps that allow advisors to prioritize their compensation over the clients’ best interest.
While most advisors act ethically, the DOL’s proposal is a responsible way to end the inappropriate transfer of wealth — which the law currently allows — from hard-working American retirement investors to those financial advisors making recommendations that are motivated by their own best interests.
The impact on American retirement investors is substantial and tangible. Financial advice that is not in the client’s best interest has a negative effect on the duration and quality of an American worker’s retirement. For some, this may mean having to retire much later than they desire. For others, this may mean not having much money to spend in retirement, including on important items like medicine. Some may run out of money in retirement.
