At Annuity FYI’s last writing two months ago about the Department of Labor’s Fiduciary Rule – the one that mandated that all advisors to retirement investors put their clients’ financial interests ahead of their own — we concluded that the rule’s zig-zagging evolution would finally come to a climax in a hearing before the U.S. Supreme Court.
As it turns out, we were wrong. For that to happen, the Justice Department, which was defending the rule in court, was required to meet a deadline to appeal to the Supreme Court to strike down a March decision by the Fifth Circuit Court of Appeals killing the Fiduciary Rule. It did not do so.
So barring a miracle, the rule is dead.
What may also be at death’s door is the decision among some wealth management firms to voluntarily follow the spirit of the rule regardless of what happens in a courtroom. This group included Bank of America-owned Merrill Lynch, which now is considering a reversal of its ban on commissions in retirement accounts. It is these commissions – as opposed to an annual investment management fee – that were deemed to be the problem because different products pay different commissions, leading to conflicted financial advice.
For retirement clients with traditional brokerage accounts, Merrill Lynch’s decision to replace commissions with fees meant either converting to a fee-based account, moving to the firm’s cheaper online offering (called Merrill Edge), or leaving the firm. And, in fact, some clients did leave, because fees that typically amount to 1% of assets were sometimes costlier for clients than commissions.
For proponents of the Fiduciary Rule, a ray of hope has been proposed by the Security and Exchange Commission that would replace it with new rules enhancing the quality and transparency of all investor relationships with investment advisors. Among other things, these are designed to prevent advisors them from putting their financial interests first. But many people familiar with the Fiduciary Rule says that the SEC’s proposals – subject to a 90-day comment period — are likely to fall short of the Fiduciary Rule standards.
If things move the way expected, largely reigniting commissions for retirement investors, is this a good thing or a bad thing?
The answer depends on what kind of investment shopper you are, especially when it comes to annuities. If you do your homework, shop around and ask good questions, the Fiduciary Rule was never important to you. On the other hand, if you do minimal homework and are overwhelmed by the complexity of many annuities, implementation of the Fiduciary Rule would have been in your interest.
So those who share the latter traits are now strongly encouraged to educate themselves more before contemplating the purchase of an annuity.
Over the years, a big problem area, in particular, has been minimally certified insurance agents, who have often misrepresented and wantonly sold popular fixed indexed annuities to retirees solely because they pay among the highest commissions. FIAs are not bad products, but buyers need to understand their minuses — they don’t come close to cloning a good year in the market – as well as their pluses.
Among the major supporters of the rule were the states of California, New York and Oregon, as well as 37-million-member American Association of Retired Persons (AARP). It would seem that the AARP is more attuned than judges to the desires and needs of retirees, including their investment concerns.
Nonetheless, the Fifth Circuit vacated the Fiduciary Rule in a split decision, arguing in part that the Labor Department had overstepped its authority in reinterpreting a fiduciary standard that had been on the books for decades.
One procedural step does remain. The clerk of the Fifth Circuit Court of Appeals must formally vacate the Fiduciary Rule by issuing what is known as a mandate. It’s simply a formality. To resurrect the rule before that occurs, the Fifth Circuit would have to take the highly unlikely step of challenging its own decision.
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