Broker Check

The Demise of the Fiduciary Rule


Monday, February 6, 2017


If you have been paying attention to the financial news lately, you may be aware of a new regulation from the Department of Labor (DOL) typically referred to as the “Fiduciary Rule”. Long story short, the rule raises the standard for all financial advisors to act in a fiduciary role for the client. This is the current standard for fee-based advisors, however other advisors (i.e., those offering commission-based products) only have to insure that an investment is “suitable” for the client. The concern is that the suitability standard leads advisors to the conclusion that as long as the product is “suitable” for the client, a very subjective standard, they can sell it to them even if the investment isn’t in the client’s best interest.  There is an inherent assumption that the very existence of a commission is in the salesman’s best interest but not that of the client.  The “fiduciary” standard requires that all investment decisions be made focusing on the client’s best interest as the paramount factor to drive that decision.  The upshot is that commission-based compensation structures are pretty much eliminated except in very limited and clearly defined exceptions.  The implementation deadline was scheduled for April 10, 2017.


The industry believes, as does much of the Congress, and many consumer-protection agencies as well, that there is at least the potential for unintended consequences, among which is that the rule will limit investor choice and perhaps eliminate the availability of advice for small investors, and will potentially increase costs for everyone. On Friday, the president delayed the deadline for 180 days, and directed a thorough review as to whether (1) any such rule is needed, and if so, (2) is the rule as written the best approach to achieve the desired/necessary ends.


The investment industry has been pointing out these issues since the DOL rule was first proposed in 2010. While some have suggested this is just “Wall Street protecting itself”, there are real problems that need to be worked out. One issue is that it severely curtails the use of commission-based products. The reasoning is that differing commissions can cause an advisor to choose a product just based on the higher commission it pays to him, even if investing in the product is not in the client’s best interest. That may be true but overlooks the fact that for lower net worth clients, commission based products can be the only way to get qualified financial advice since small accounts often cannot meet the minimum required amount to open a fee-based account, or justify the assistance of a qualified advisor.


Another issue is the question of enforcement. The entire financial industry has been working diligently to read and interpret the rule and to develop and implement compliant processes. There is a tremendous amount of uncertainty, however, as to how enforcement will be implemented. The fear is that it will be enforced via costly litigation where one runs the risk of a judge or, more likely a jury being swayed by an attorney’s argument more so than the letter of the law or the objective facts of the case. With this kind of inherent risk, it is impossible to ever be completely confident in the adequacy of your processes. Finally, as is common with all regulation, this creates new artificial hurdles that advisors must adhere to with regard to mountains of recordkeeping and compliance which increases costs and will ultimately cause an increase in client fees.


At this point, you’re probably thinking, “How does this affect me?”. Honestly, not very much at all regardless of whether the rule ultimately goes into effect. At DFS Advisors, 80 – 85% of our business is fee-based and thus already largely compliant with the fiduciary standard as proposed by the DOL regulation.  Furthermore, all of our business is covered by the fiduciary standards set by the CFP Board and the CFA Institute. The CFP Board’s fiduciary standard is much more stringent than the one set by the DOL Rule with disciplinary action up to the permanent loss of CFP certification. The CFA Institute also has a similar high fiduciary standard in its Code of Ethics to which its charterholders and candidates must adhere. So, when it comes to making investment decisions, you can be assured that you are already protected by a fiduciary standard.


As always, if you have any questions or just want to talk, feel free to reach out to us.



Jim Denton

James C. Denton, CFP®
Managing Principal


The opinions expressed in this article are those of the author and do not necessarily reflect the views of LPL Financial.  This is not intended to provide investment advice for any individual investor.  You should discuss any choices or decisions with your financial advisor before implementing any changes to your investments.