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Fiduciary Rule Lawsuits Could Spur Industry Reform

Michael Wong, CFA, CPA

Last week, the Department of Labor delayed the applicability of the fiduciary rule by 60 days. Morningstar's Aron Szapiro shared his take on the delay here

Michael Wong: In February, President Trump signed an executive memorandum directing the Department of Labor to conduct an updated economic and legal analysis of its Conflict of Interest, or fiduciary rule. The purpose of the fiduciary rule is to ensure that financial advisors to retirement accounts act in their clients' best interest and generally requires that enhanced prudent policies and procedures be in place for financial advisors to receive variable payments such as sales commissions.

One specific area that President Trump asked the Department of Labor to look into is whether the fiduciary rule is likely to lead to increased litigation. We recently estimated that usage of the Best Interest Contract to receive variable payments could reasonably lead to $70 million to $150 million dollars of class-action lawsuit settlements annually. While in an ideal world there would be no class-action lawsuits--as advisors would consistently act with their clients' best interest in mind--we believe that the prospect of class-action litigation can serve as an incentive for financial institutions to establish prudent policies and procedures that protect their clients, which the current system, involving individual arbitration, doesn't do well. 

The recent Wells Fargo announcement of an agreement in principal to settle a class-action lawsuit for fake account openings is a good example of a class-action lawsuit providing restitution to people for an arguably bad system.

Overall, we believe that the world of financial advisory is moving toward a fiduciary standard of care, and that, while class-action lawsuit settlements could be a transitional pain and swing earnings, they serve an arguably useful purpose.