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DOL Fiduciary Rule: What the Court's Decision Means for Advisors
The shift to best-interest advice will continue, with or without regulators’ help
The future of the Department of Labor’s fiduciary rule just got murkier. A panel of the 5th Circuit Court of Appeals struck down the rule on Thursday. The Labor
Department could appeal to the U.S. Supreme Court, ask the full 5th
Circuit to reconsider, or revise the rule to focus on areas where they
have clearer legal authority and ongoing concerns, such as the advice
being given to small plans. The fiduciary rule has been in partial effect since June 2017. But
it’s accelerated an ongoing, irreversible trend: Clients are
increasingly demanding advice in their best interests, and many advisors are changing their business models to
deliver it. The rule has already spurred many financial institutions to examine
their conflicts of interest and to take steps to provide best-interest
advice. This focus on best-interest advice is a global trend, driven
by the maturation of the defined-contribution system. With more
individuals responsible for their retirement savings, policymakers
have been increasingly interested in ensuring investors get the advice
they need to succeed in achieving a secure retirement. The SEC also continues to make progress on its
advice rule. In public statements, Chairman Jay Clayton has said the
draft version of a uniform advice standard will be ready by the end of
June and won’t be merely a “disclosure-based” standard. Given that the
DOL rule was partially delayed and the widespread assumption was that
DOL would craft an exemptive class for anyone following the SEC rule,
this court decision may not make that much difference. It’s hard to say where the dust will settle with so many moving
parts—an SEC rule on the horizon, more uncertainty
with the DOL rule, and perhaps even congressional intervention. However, one thing is clear: Investors are moving toward advisors who put their
interests first and manage their conflicts of interest. And, many
financial institutions have responded to these investors and the DOL
rule by changing their business models. Further, assuming this court decision means the SEC takes over as
the primary regulator of advice, it could be good for advisors. The
SEC could normalize treatment between taxable and nontaxable accounts
for registered investment advisors and broker/dealers giving advice to
retail investors. For the most part, investors with ERISA protections can sue in
federal court if their fiduciary fails to act in their best interests.
But the SEC regulates advice pursuant to the Investment Advisers Act
of 1940, which does not generally allow investors a court remedy,
except in some unusual cases. The DOL’s fiduciary rule was expected to set up an enforcement
mechanism that would have left financial institutions subject to class
action lawsuits in state courts. This was a key issue in the 5th
Circuit Court of Appeals decision, in which the panel ruled that the
Labor Department overstepped its authority. Regardless, we think the shift to best-interest advice will continue, with or
without a tailwind from regulators.Aron Szapiro
What does the appellate court’s ruling mean for advisors?
Learn more about how Morningstar can help you
provide best-interest advice to your clients.
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