Department of Labor's Fiduciary Rule

We don’t expect the average person to know too terribly much about the Department of Labor’s new Fiduciary Rule that just began its implementation last week. Frankly, we are not sure why most people would, unless they are in the financial planning industry. For everyone that isn’t in the know, allow us to sum it up: As soon as this law takes effect, financial advisors and brokerages will be forced to act in your, the client’s, best interests. For a much more detailed explanation of the Rule, click here.

We know what you’re thinking. “Wait a second, you mean that in the past, financial advisors did NOT always act with my best interests in mind?!?” In many cases, no. Acting solely in the client’s best interests is what is called The Fiduciary Standard, and many financial firms do not uphold this standard. No, they are currently held to a slightly less strict standard called Suitability, which we’ll dive into more next week.

For now, we’d like to stick to the DoL’s new rule, and the saga behind it. As we said, this rule makes it law that financial advisors and firms must act in the client’s best interest. Initially introduced in 2014, the Bill has been revised and scrutinized more times than a celebrity pre-nup.  Congress has had this under a microscope for quite a while because they are looking for a way to kill it. See, many financial firms make a very large portion of their income from selling financial products that clients don’t really need. We have written in the past about commission based firms being less trustworthy (see here), but this is just excessive. These firms have spent millions of dollars lobbying Congress to either kill or alter the bill to a more favorable version.

Do you know why large commission firms want to get it killed? Well, they have stated in Congress that it will take too much time to “file paperwork” and such that their business will go down. (Read: They’ll lose a ton of money because they can’t sell inappropriate products and will have to spend time justifying their recommendations to federal regulators.) To put a concrete number on it, a recent study from global strategy firm A.T. Kearney estimated that the DoL Rule will have a $20 billion revenue impact across the industry.

Naturally, a rule like this does not happen overnight; as we have said, this measure has been researched and debated for several years, with the final version just being published this past April. This current version is decidedly less draconian than the original, and to many financial lobbyists’ credit, it will be an expensive undertaking to document and justify every recommendation and product put to clients. Ultimately, with support from both sides of the aisle and the general public, this Bill seems destined to take full effect. And it is the opinion of this particular firm that it will be for the direct benefit of the average person. Stay tuned.