The Fiduciary Rule Is Dead, but the Conversations Aren’t

The Fiduciary Rule may be gone, but it’s definitely still a vibe.

The Biden-era legislation was struck down by a federal court last week after an almost decade-long saga, dating to an Obama administration push to make clients’ best interest mandatory in selecting financial products, especially in defined contribution plans and 401(k) rollovers. For advisors, that means a legal fiduciary obligation is no longer universally required with the industry now working under the longstanding “five-part test” (even though everyone hates taking tests). But even if the Department of Labor’s Retirement Security Rule is dead, the questions it raised about serving clients appropriately are very much alive.

“More people are starting to ask how their advisor is paid and whether they’re truly acting in their best interest,” said Carla Adams of Ametrine Wealth. “That shift in awareness may end up being the most meaningful long-term impact.”

32 Flavors and then Some

It’s not a secret in the industry that the term financial advisor can mean a fiduciary practitioner, a broker, an insurance agent or, increasingly, some combination of all three. But that concept is simply not on most Americans’  radar. “Most people don’t realize there are different standards, fiduciary vs. suitability, or why that even matters for their own money,” Adams said. “Without the fiduciary rule, there’s lots of room for recommendations that benefit the advisor more than the client, especially when it comes to big decisions like rolling over a 401(k).”

While Adams said the ruling is a negative for consumers, she pointed out that the issue at hand isn’t the fees themselves that clients may rack up. “To be clear, charging a fee on those assets isn’t inherently a bad thing if the advisor is providing real, ongoing value,” she said. “The issue is that many clients don’t fully understand what they’re paying, or what they’re getting in return.”

Insurance lobbyists applauded the decision and said the new rules give Americans more choice. The Department of Labor said it has no plans to attempt a new rule and seek public input. According to a government release:

• The agency’s Employee Benefits Security Administration is responsible for more than 156 million Americans, who are covered by approximately 2.6 million health plans and 801,000 private retirement plans.
• Together, those plans hold almost $14 trillion in assets.

“The challenged regulation wrongly sought to impose ERISA fiduciary status on securities brokers and insurance agents when there was not a relationship of trust and confidence,” Daniel Aronowitz, assistant secretary of labor for employee benefits security, said in a statement. “The Securities and Exchange Commission and state regulators regulate the activities of securities brokers and insurance agents and will continue to do so.”

Cat’s Out of the Bag. While the rule lost in court, it may have won in the court of public opinion. In fact, the real impact of the legislation may have nothing to do with enforcement at all, said Joon Um of Secure Tax & Accounting. “For clients, it just means they need to be a bit more aware and ask a few basic questions,” he said. 

For advisors who already operate under a fiduciary mindset, it’s business as usual. And, the rest of the industry isn’t likely to change their business models following the court’s decision, which was widely anticipated. “The rule may be gone, but it got people thinking,” Um said. “That’s likely the biggest impact.”