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The Daily

Suit Filed to Stop Rule Mandating Fiduciary Standard in Retirement Advice

Chris Gaetano
Published Date:
Jun 3, 2016
GavelA coalition of business trade groups have filed suit against the federal government to stop a new rule that they fear would hurt small investment advisers, raise legal liability risk, and increase costs for clients, according to CNBC. The new rule, which was approved in April, would amend the Employee Retirement Income Security Act to require advisers giving requirement advice to follow a fiduciary, versus a suitability standard, meaning they would be mandated to act in their clients' best interests. 

The difference between the two can be subtle, but significant. Under the more strict fiduciary standard, the adviser must act in the best interests of the client, even if doing so is not in the best interests of the adviser. By contrast, a suitability standard means that the adviser acts in what is merely suitable for the client based on their financial objectives. Imagine a financial adviser faced with two possible investments for their client. One generates good returns for the client, and nets the adviser a big commission. The second generates even better returns for the client, but also results in a smaller commission for the adviser. Under a fiduciary standard, the adviser is required to take the second option; under a suitability standard, they can choose the first if they want (and probably will). Plan Adviser Magazine says that firms often operate under a suitability, not a fiduciary, standard. 

The lawsuit was filed by Chamber of Commerce, along with the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute and the Securities Industry and Financial Markets Association. A joint statement from these organizations warned that, under these regulations, it simply won't be economical to offer advisory services to small businesses, which would significantly reduce retirement savings options. 

“Instead of helping savers plan for retirement, the new rule will unfortunately restrict their access to affordable retirement advice and limit their options for saving. The rule will shackle Main Street financial advisors with extensive new requirements and constant liability, forcing them to limit the options and guidance they provide to retirement savers," said the statement. 

Secretary of Labor Thomas E. Perez, in a statement of his own, was untroubled by these assertions, saying that the objections only come from a small, vocal minority that "support a status quo that enables them to put their own interests first." 

“Conflicted advice is eroding the savings of working Americans to the tune of $17 billion each year. The Conflict of Interest rule aims to address that problem by requiring retirement advisors to look out for the best interests of their clients. Many financial services professionals, from small town advisers to some of the nation’s largest firms, engaged constructively with the department throughout the rulemaking process and, after publication of the final rule, noted that they do put the interests of their clients first and are well positioned to comply. They recognize that putting their customers first is good for business," said Perez. 

These thoughts were echoed by Kathleen M. McBridge, Chair of The Committee for the Fiduciary Standard, an investor group that advocates for the advancement of the authentic fiduciary standard in both business practices and financial reform. 

"Investors left with 50 percent of their retirement nest egg cannot retire with dignity and financial security. The DOL Fiduciary Rule is enormously beneficial to millions of Americans who work and sacrifice to save for their own retirement. As a nation, we ought to be encouraging retirement security and the best outcomes for hard-working retirement investors, not allowing broker-dealers and insurance companies to systemically fleece them," she said