What Every American Needs to Know About the Fiduciary Rule

Change is coming to the long-debated “fiduciary rule” that governs how financial advisors manage client funds, but that will likely only mean good things for the millions of Americans who trust their money to a professional advisor.

And that’s good news. 

As has been expected since Pres. Biden took office, the Labor Department has initiated its rulemaking process to consider altering how investment advisors fiduciary responsibilities for clients using products like employee investment plans and IRAs.

The proposed changes include considering having the Labor Dept’s Employee Benefits Security Administration assess the practices of investment advisers and the expectations of plan officials, participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest.

What is the fiduciary rule? Simply put, the Department of Labor (DOL) fiduciary rule requires that advisors act “in the best interests of their clients” and but their clients’ interests above their own when making investment and management decisions for them. 

It was originally instituted in 2017 but was struck down by an appeals court in 2018. Now it’s making a comeback.

Wait, why do we need a rule for this? It seems like it should be common sense, right? When a client hires a financial advisor they expect the decisions made for their money to be in their best interest.

But the reality is that many advisors have competing priorities. There are potential conflicts of interest across different investment products and providers, along with fees and commissions that might have an impact on a client’s long-term growth potential. Under the fiduciary rule, all of these details much be clearly disclosed to clients.

What could change? A lot, or a little.

A new administration proposing rule changes is far from out of the ordinary, but the specific changes on the table are “significant news given the breadth and potential effects of the DOL’s prior efforts to re-define fiduciary investment advice,” according to Groom Law Group. 

Phyllis Borzi, a former Labor Dept official in the Obama administration, notes that in consideration of these changes, the ESBA “will not try to stifle comment by using the same unreasonably short 30-day comment periods that the Trump folks used under former Labor Secretary Eugene Scalia.”

Takeaway: It’s worth watching, but the debate of the details of the “new” DOL fiduciary rule are inside baseball for most investors. Yes, the eventual guidelines will have an impact on how advisors work with clients, but whatever comes out of this will most likely improve the process (and potentially outcomes) for clients at the end of the day and that’s what matters here.