The Department of Labor’s attempt to regulate financial advisors is dead. Rest in peace, DOL rule. As you go into the great unknown, you deserve a eulogy to recognize the impact that you’ve had on the world.
Let me start by saying that your impact was overwhelmingly positive, even though you were deeply flawed. You helped bring the fiduciary issue, obscure and opaque as that issue can be, to the forefront of even the public media. You made the issue simple by stating that financial advisors and brokers (meaning all types of advisors and brokers) must work in the best interest of their clients, something that under existing brokerage rules, they do not! You pointed out that the system was flawed and needed to be corrected. You gave hope to all of us who felt that all financial advisors and brokers must be held to a higher standard — but are not. You woke up the investing public!
But your creators made a mess of you. They made you complicated and unworkable. You became mostly about how advisors are paid, rather than how advisors should behave. Your rules were applied only to retirement accounts, not to all types of accounts. Insurance was mostly exempted, even though many investments are delivered through insurance products. Lastly, you were weighed down by the Best Interest Contract Exemption (BIC), a complex web of disclosures and exemptions that no advisor, let alone investor, could possibly understand.
Having said that, you triggered changes in the brokerage world. Many broker-dealers, probably most, changed processes and procedures for the better. High-commission products have fallen out of favor and brokers and advisors across the investment landscape now pay closer attention to their recommendations to make sure that those recommendations are in their clients’ best interests. Brokerage firms have put in place oversight processes to make sure that is happening. Financial advisors and brokers are doing a better job writing down what they are doing and why they are doing it. All of this is good for investors and good for the industry.
More importantly, you pushed the SEC to consider implementing a common standard for the industry. While it isn’t yet clear exactly where the SEC will come out, there are encouraging signs. First, the SEC is doing this with the benefit of knowing what worked for you, as well as what didn’t work. That learning will be beneficial. Second, the SEC has The Investment Advisers Act of 1940 from which to build the new rule. The ’40 Act is the gold standard regulating financial advisors. In essence, it says that advisors have a duty of care to put their clients’ interests ahead of their own, and a duty to disclose in writing any conflicts of interest that do exist. Third, the new rule will apply to all financial advisors and brokers (Registered Investment Advisors are covered by the ’40 Act today, but brokers are only held to the much weaker “suitability” standard). Applying one rule to all advisors, and all types of accounts, will be a great win for investors and investor protection.
So, DOL rule, you lived a very short life. Some may say you didn’t live at all. But I say to you: thank you for what you accomplished. You made a difference, and perhaps launched a new age of better investor protection. RIP.
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