Most American adults know that we live in an extremely litigious society. So while it may seem hard to believe, maybe it’s not such a stretch to accept the reality that the U.S. Department of Labor’s Fiduciary Rule – one that says that all retirement investment advisors must give advice in the best interest of the investor – will ultimately be decided by no less than the Supreme Court.
The DOL rule has followed a twisted path since it was originally scheduled to be phased in a year ago. First President Trump asked for a review of the rule, delaying the start of adoption. Then full implementation was pushed back to July 2019. Now everything is up in the air because the Fifth Circuit Court of Appeals last month vacated the fiduciary rule in a 2-1 decision.
This is where the hard truth of our suit-happy country enters the picture. The Fifth Circuit, based in New Orleans, focused on the strings attached to the Fiduciary Rule. Specifically, part of the rule allows brokers to receive commissions instead of fixed fees if they sign contracts binding them to act in clients’ best interests. As it turns out, much of the securities industry views this as an invitation for class-action lawyers to bring expensive litigation.
So the next step, say a number of lawyers, is likely litigation before the U.S. Supreme Court.
Should you, the retirement investor, care about the ultimate ruling?
It hinges on what kind of annuity shopper you are. If you do your homework, shop around, ask questions and embrace a bit of skepticism, the rule means little. On the other hand, if you do minimal homework and are overwhelmed by the complexity of many annuities, which many annuity buyers are, implementation of the Fiduciary Rule is very much in your interest.
The Fiduciary Rule means that all advisors to retirement investors must give advice in the best interest of the investor — not their own. In other words, they are not to be incentivized to sell a particular product because it pays a higher commission than alternatives. Advisors are also barred from making misleading statements and must clearly disclose all fees and commissions. And yes, they often must sign contracts. 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.
Among major supporters of the Fiduciary Rule who want retirement investors to get a fair shake is the 37 million-member American Association of Retired Persons (AARP). The Fifth Court decision marks the first court loss for the DOL rule. Just a week before that, for example, judges on a Tenth Circuit appeals panel upheld the rule.
Regardless, there is some good news for investors. At this point, the Fiduciary Rule has attracted a lot of attention. As a result, many potential new clients are now aware of what it means to be a fiduciary and, more important, are increasingly demanding a higher standard of care. Increasingly, many insist on working with fiduciaries only. Regardless of the fate of the Fiduciary Rule, this often means paying fixed fees, not commissions.
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