Fiduciary rule: from today, US retirement advice must be in client’s ‘best interest’

Two months after it was originally due to take effect, the so-called fiduciary rule – which is designed to ensure US investors are only sold retirement products that serve their best interests, rather than those of their adviser – comes into force in the US today. 

The Obama-era legislation had been targeted by the incoming Trump administration, which included it among a number of laws that it said were burdensome for businesses.

In February, President Trump issued an executive order which called on the US Department of Labor to embark on a study of the rule to assess whether its implementation would limit investors’ access to investment products or advice, cause disruptions in the industry, and/or increase litigation against companies providing such advice and products. A month later, as reported, the DOL formally moved to delay the rule’s original 9 April deadline by two months.

The coming into force of the fiduciary rule has been welcomed by consumer groups and the US consumer media, but some business organisations are still advocating that it be overturned, on grounds that it will be costly, complex, and ultimately result in consumers paying more.

Many US market observers have said the industry will struggle to row back from the rule, since investors have long assumed that their advisers and brokers had their best interests in mind all along when they recommended retirement products.

A survey released in April by Financial Engines, a US advisory business, found that 93% of Americans  thought that financial advisers who provide retirement advice “should be legally required to put their clients’ best interest first” –  as the fiduciary rule mandates – and that more than half of respondents, or 53%, mistakenly believed that such advisers were already required to do so.

US RIAs already held to fiduciary standard 

In actual fact, US “registered investment advisers” (RIAs) have been held to a “fiduciary standard” since 1940, and many of them say they see no reason why being obliged to put their clients’ interests ahead of their own when selling them financial products should not be mandatory for those selling insurance products and retirement plans as well.

Until today, US insurance brokers have been required only to meet a lesser “suitability standard”.

Retirement investors ‘not safe yet’

As the New York Times noted in an editorial last month, those preparing to celebrate the taking effect of the fiduciary rule today might be premature in their popping of the Champagne corks. Because although US Labor Secretary said that the rule should go ahead – the announcement coming, as reported, on the opinion pages of the Wall Street Journal – his message was more along the lines of there being no legal way, for now, to hold off, rather than an acquiescence to the idea that the law would remain.

Retirement investors, therefore, the NYT said, “aren’t safe yet”.

In a separate development, the US house of Representatives yesterday approved legislation that includes a provision that would kill the fiduciary rule, while House and Senate Republicans introduced stand-alone legislation that would do the same thing.

Media reports noted that the legislation, as written, stood little chance of being passed by the Senate. The House bill, which was approved by 233 to 186 due to Republican support, is called the “Financial CHOICE  Act“, and would overhaul the Obama-era Dodd-Frank financial reform law, of which the fiduciary rule is a part.

Australia now enforcing its new ‘fiduciary rule’

As US insurance brokers, financial advisers and financial services companies await word as to whether president-elect Donald Trump really will go ahead with rumoured plans to derail a proposed, legally-binding “Fiduciary Rule” affecting retirement product sales, Australia’s regulator has begun enforcing a similar rule.

Although it wasn’t widely noticed outside of Australia, that country recently adopted a concept identical to America’s Fiduciary Rule, as part of its Future of Financial Advice reforms, which came into force in 2013.

It’s known there as the “Best Interests Duty” – although, like the American rule, it assigns to advisers the requirement to “act in the client’s best interests”.

As reported, Registered Investment Advisors (RAs) in the US have been held to a “fiduciary standard” since 1940, and many of them say they see no reason why they should not being obliged to put their clients’ interests ahead of their own when selling them financial products – which is what the Fiduciary Rule, due to begin coming into force next April – will require of retirement product salespeople.

However, US insurance brokers, who currently are required to meet a lesser “suitability standard” when selling retirement products, oppose the introduction of the Fiduciary Rule for the same reason that Australian financial services businesses took issue with the Best Interests Duty when it was first proposed, as part of a sweeping package of rule changes known as the Future of Financial Advice (FoFA): They argue that it will increase their costs.

And consumers will be less well off, the American insurance brokers add, because they will have to pay for more advice, as the Fiduciary Rule will make products that pay commission potentially seem inherently suspect, and thus they will have to move away from a commission-based remuneration model.

Many US firms are in the process of doing this now, according to recent press reports, which note the uncertainty created by Trump campaign talk of repealing the Fiduciary Rule.

First action in June

In June of last year, as reported, the Australian Securities & Investments Commission took its first action against an Australian business for failing to comply with that country’s version of the US fiduciary rule, which in Australia is called the “Best Interests Duty”.  A few months later, in November, ASIC said it had banned a Brisbane-based life insurance adviser from providing financial services for a period of five years, for, in ASIC’s words, “fail[ing] to act in his clients’ best interests when providing advice”, in addition to failing to comply “with several financial services laws”.

The Best Interests Duty came into force in Australia in 2013, as part of that country’s so-called Future of Financial Advice reforms. Like the American rule, it assigns to advisers the requirement to “act in the client’s best interests”.

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