The U.S. Department of Labor’s first attempt in years to revise rules guiding financial advice — released on Oct. 31 — pussyfoots around real problems, offering mild help but little comfort for consumers who need financial guidance now more than ever.
This fight over a fiduciary standard for financial advice — requiring all advisers to put a customer’s best interests first — has been going on for close to 50 years now, largely because spineless legislators and mealy-mouthed financial services companies don’t want to give up old ways stemming from times when the public didn’t know enough about its finances to manage them actively. In all that time, progress has been slow and legislative advances mostly ineffective.
This latest Labor Department announcement was more of the same.
A fiduciary is a person (or organization) who puts their clients’ interests ahead of their own; they have a duty to preserve good faith and trust.
That’s exactly what most people thought they were getting with a financial adviser, insurance agent or broker, but the reality is that different standards have long applied to various types of adviser.
Rather than holding everyone in the financial services world to a fiduciary standard, many advisers had only a “suitability standard,” requiring them to sell products deemed “suitable” for the client. Agents who sold products on commission could legally steer clients towards items that paid more, even if it provided a lesser outcome for the consumer, provided the product was “suitable” for the client.
The Department of Labor has been working on the issue through multiple presidential administrations. In 2016, under the Obama administration, the department finalized a rule that should have helped — though it was limited in scope too — but which was subsequently struck down in federal court.
In 2020, the Labor Department issued Proposal 3.0, which reinstated the investment advice definition of a fiduciary that had been in effect since 1975, and added some new definitions. Proposal 4.0 was the update made on Oct. 31.
The proposal, formally called the “Retirement Security Rule: Definition of an Investment Advice Fiduciary,” does close a few loopholes. Specifically, any advice given around withdrawing assets from a 401(k) or other employer-sponsored plan now must adhere to a fiduciary standard, and firms working with employers to pick investments made available in those plans must now make recommendations that are in the client’s best interest.
The Securities and Exchange Commission, rather than the Department of Labor, has a best-interest rule in place over advice to purchase securities, but that fiduciary standard (and the SEC’s authority) did not extend to commodities or to insurance products such as indexed annuities. The proposed rule removes the product loopholes, requiring retirement advisers to provide advice in the saver’s best interest no matter the investment idea they’re selling.
Proposal 4.0 is part of the Biden administration’s push to get rid of junk fees impacting consumers. In making the announcement, the White House said that mandating fiduciary recommendations — thereby eliminating excessive costs, fees and conflicted dealings — could increase retirement savers’ returns by between 0.2% and 1.2% per year, which over an expected lifetime of investing could boost retirement savings by as much as 20%.
“The current system has never gone far enough to protect consumers.”
It shouldn’t be hard to create and follow a standard of care, caution and best interests, but there’s a reason why this has dragged on for decades, and no guarantee the latest proposal gets through.
Many industry groups representing retirement plan sponsors and financial professionals — the Insured Retirement Institute, for example — are adamantly against it (and have a vested interest in taking that stand). Other powerful industry groups — for example, the Investment Company Institute, the trade association for the mutual fund industry — made statements saying they’re on the fence while analyzing the proposal; however, they seem mostly satisfied with current regulations.
The current system has never gone far enough to protect consumers, and the revised rules, if passed as proposed, don’t make things much better. Too much wiggle room for bad actors is left by not including an across-the-board mandate to put customers’ interests first.
Having more fiduciaries is good, but having everyone be a fiduciary would be better. George Kinder, founder of the Kinder Institute of Life Planning and a long-time thought leader in the world of financial advice, has a stunningly simple idea that would revolutionize not just the financial services business but all public and private entities.
It’s called “fiduciary in all things,” or FIAT for short.
Simply put, Kinder believes that “a fiduciary standard of obligation is required for all institutions — corporate, non-profit and governmental — to place the interests of all stakeholders, of truth, of humanity, democracy, and the living planet that sustains us, first above their own self-interest.”
In a recent interview, Kinder spoke of launching a movement to get people from all walks of life to look past the things that polarize us, and to create a fiduciary standard approach to essentially all things.
Consumers, no matter what they disagree on personally and politically, are aligned on personal services. They want their interests served and don’t want to be taken advantage of.
The financial services companies won’t like any of this, but they will choke it down, because the fact is that living up to fiduciary standards is a profitable business model.
It’s long past time that this issue got resolved around money advice. Rather than permitting rules written decades ago to protect financial-services interests, it’s time for U.S. leaders to come up with new rules to put consumers first.
More: ‘I’m feeling the pain with you.’ What financial advisers do to keep you from panicking about stocks.
Also read: Financial advisers make rich people richer. But is that all there is?