Will a New Rule Force Brokers to Care about Clients As Much As We Do?

Wall Street has been buzzing the past week over an issue about which most Americans probably do not realize they should be concerned.  Last Wednesday, the Department of Labor (DOL) issued a rule that aims to hold brokers to a higher legal standard when it comes to putting their clients’ interests before their own.  We examined the provisions of the new rule to see if it really will force brokers to prioritize their clients’ interests as much as we do.  Our conclusion?  Probably not, but it’s certainly a step in the right direction.

Last September, we published the blog post, “Why We Are Legally Required to Care about You More Than Investment Brokers.” This post explained how Professional Financial Solutions, as a registered investment advisor firm, is held to a fiduciary standard of care for our clients.  As fiduciaries, we are required to act in the best interest of our clients, regardless of the type of account, without regard to our own interest.  It may come as a surprise to some that there is any other way of doing business, but in fact brokers have traditionally been held only to a suitability standard, which simply requires them to have a reasonable basis for believing that an investment is “suitable” for a client, given their age, financial situation and objectives, etc.  The suitability standard is a much lower bar, one which allows some brokers to push subpar investment products in the interest of collecting high commissions or other perks. 

Last year, the DOL proposed a rule that would hold brokers to a fiduciary standard with respect to clients’ retirement accounts.  The final version of the rule released last week does accomplish that to some extent, but as the DOL explains, the rule includes “broad flexible exemptions” to “help streamline compliance,” essentially watering down some of the requirements from the proposed rule and allowing avenues for brokers to continue much of their business as usual.  For example, the new rule puts a burden on brokerage firms to ensure that compensation structures do not encourage brokers to make investment recommendations contrary to a client’s best interest as well as to clearly disclose and try to mitigate conflicts of interest.  However, brokers can still receive compensation via commissions and revenue sharing, even if paid by a third party, such as by the mutual fund that a broker is recommending to his client.  In addition, the proposed version of the rule excluded certain asset classes from retirement accounts given, among other considerations, their high fees, but the DOL eliminated this list from the final version, permitting brokers to continue selling, e.g., variable annuities, non-traded real estate investment trusts, and proprietary investment products in retirement accounts.

The DOL rule will not go into effect for another year, and still has to survive political and legal challenges from its opponents prior to implementation, but most of the financial services industry seems sufficiently pleased with its “balanced” approach to render at least passive support.  From our perspective, it seems to be a small win for retirement savers, though it is still far from reaching the level of service and commitment that we–and other registered investment advisors–are legally required to give clients.