Last week’s Presidential election surprise has created great uncertainty regarding existing laws, regulations, and policies. With the Department of Labor’s expanded “fiduciary” standard set to become effective in April, many have offered their opinions on the prospects of that occurring as scheduled. It may very well become effective as planned. It may be delayed. It could even be wiped out. We really have no way of knowing at this point in time, particularly if the magic eight-ball approach to answering policy-related questions continues. Uncertainty is likely to prevail for the next few months, if not longer.

Whether the fiduciary standard will expand as planned – that is one question. The risks of relying on a non-fiduciary and the value of a fiduciary, however, are entirely different questions. Fortunately, we have clear and certain answers to those questions.

Certainty: Risk of a Non-Fiduciary. It is well established that non-fiduciaries have significantly more freedom to put their own interests first and significantly less reason to proactively work in their clients’ best interests. The Department of Labor reminded us:

  • “Recent studies show that the vast majority of Americans understandably but mistakenly believe their financial advisers are required to act in their clients’ best interest. The reality is very different.”[1]
  • “Many brokers, consultants, and advisers hold themselves out as expert advisers, but are not, in fact, required to adhere to a fiduciary standard.”[2] 
  • Today, “many investment professionals, consultants, and advisers have no obligation to adhere to ERISA’s fiduciary standards or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments.”[3]
  • “Under ERISA and the Code, if these advisers are not fiduciaries, they may operate with conflicts of interest that they need not disclose and have limited liability under federal pension law for harms resulting from the advice they provide.”[4]
  • “Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries.”[5]
  • “In other words, today’s rules allow some financial advisers to put their bottom line ahead of their clients’ retirement security.”[6]

Certainty: Value of a Fiduciary.  Similarly, the value of a fiduciary is well established. Federal courts have instructed that a fiduciary’s duties are the highest duty known to law.[7] Having your investment adviser be a fiduciary is important because “it means that they are required to give you advice that is in your best interest, not their own.”[8] Without regard to whether a regulation forces various investment professionals to perform services in a fiduciary capacity, those that serve in a fiduciary capacity will have undertaken the highest duty known to law and must put their clients’ interests first. Those certainties will persist, even in uncertain times.

 


[1] “Protecting Retirement Savings FAQs”, United States Department of Labor, Question 6.
[2] “Protecting Retirement Savings FAQs”, United States Department of Labor, Question 11.
[3] 81 Fed. Reg. 20,946 (Apr. 8, 2016).
[4] Id.
[5] Id.
[6] Id.
[7] Donovan v. Bierwith, 680 F.2d 263 (2d Cir. 1982), cert denied, 459 U.S. 1069 (1982).
[8] “Protecting Retirement Savings FAQs”, United States Department of Labor, Question 4.
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