Views on improving the integrity of global capital markets
22 June 2016

Genesis of DOL’s Fiduciary Rule and Why the Political Battle Wages On

Baseball great Yogi Berra once said of a National League pennant race, “It ain’t over till it’s over.” If a group of nine industry organizations has its way, the Department of Labor’s (DOL’s) fiduciary rule, issued in April to address conflicts of interest in retirement advice, ain’t over either. In fact, there is a very good chance that it won’t be over for a while.

The organizations suing the DOL aren’t concerned so much with the best interest contract exemption requirement, or even the narrowing of investment options for personal retirement accounts. Make no mistake, the costs of such requirements and the expected loss of revenue and client assets are unwelcome outcomes for the businesses these organizations represent.

No, the industry is most concerned about the potential for trial lawyers to use the rule to launch a massive legal offensive on the financial sector aimed at advice given and investor outcomes. As one industry representative said to me after a panel discussion hosted by CFA Society Washington in April, “your members won’t like this.”


Making Enemies with Hardball Politics

It is no surprise that the DOL’s fiduciary rule has so many enemies. It will cut deeply into $18 billion in annual fees the industry now enjoys. Morningstar has estimated that upward of $3 trillion in assets under management will come into play as a consequence of the rule. When so much money, and the lifestyles that go with it, are threatened, one should expect a big fight.

But the Obama administration didn’t make things any easier for either itself or the rule’s supporters with its approach. From its decision at the launch in February 2015 to portray the problem as $17 billion of investor “losses” every year because of poor investment recommendations, to its choice of a progressive think tank to announce the final rule in April 2016, the administration brought its brand of hardball politics into what was previously a nonpartisan, or at least bipartisan, policy arena. By doing so, it also made support a partisan matter. That has not been good for anyone.

Politically speaking, the February 2015 rollout, replete with President Obama’s personal presence, was brilliant. It dared his opponents—and many inner-city allies—to publicly say they didn’t think it was a good idea for “financial advisors” to have their clients’ best interests in mind when suggesting retirement investment options. Opponents were stuck, initially, and unable to counter the argument that investment vehicles charging fees of 2% to 3% were inappropriate for many, if not most, retirement investors. But brilliant political moves do not necessarily mean good policy or good outcomes for real people.

When opponents regained their footing, they responded with the tried—and, to some disputed extent, true—rebuttal that such a proposal would deprive many low-income investors of professional investment advice. Small investors, they argued, would not have access to advice just when they might need it the most, such as after receiving a small inheritance. Of course, this line of reasoning did little to address the thorny matter of how a guaranteed-income annuity could drain a retirement account of years of earnings, or how some complex instruments sold to retirees were deemed appropriate.

The reasoning did consider, however, the very real possibility that without professional advice, some, and perhaps many, investors would have few options beyond a “safe” bank certificate of deposit, yielding less than 2% if you’re willing to put it away for five years. At those rates, the amount of time people would need to build a retirement nest egg would nearly triple.

Investors, Lawmakers Face Tough Choices to Move in Right Direction

Investors have to weigh their options and make difficult choices, sometimes concluding that a high-priced option is better than a low-yield option. As long as they are aware of the different options, and any in between, they might prefer the opportunity to weigh those trade-offs and make a decision based on what they believe will meet their needs best.

The problem is, they weren’t and aren’t aware. And they aren’t aware because of the subterfuge some parties to this lawsuit used to deliberately confuse investors. Use of the ever-so-subtle term “financial advisor” sounds awfully similar to the title, investment adviser, but they are anything but similar. I know the difference, and it still occasionally catches me off guard. The SEC should have stopped these deceptions years ago.

Like investors, politicians must also make difficult choices and accept legislation that is less than perfect to move things in the right direction. The desire for a higher standard of care might have been worth the Obama administration compromising on some provisions in this case. But President Obama and Labor Secretary Thomas Perez wanted it all, and they didn’t want to deal with trade-offs. They won, but as the pending lawsuits indicate, in the long run it may prove a Pyrrhic victory.

Maybe the Obama administration’s approach was needed to get movement on this difficult issue. With that much money at stake, it was going to take something drastic to get movement. But the hardball approach has its drawbacks, and those of us who favor a best interests standard must hope the politics used to get this rule through the system won’t come back to taint the term “fiduciary duty” for a generation to come.

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About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

5 thoughts on “Genesis of DOL’s Fiduciary Rule and Why the Political Battle Wages On”

  1. James Drum Sr. says:

    What can an investor question his financial advisor about this legislation. I have asked my advisor about her fiduciary responsibility but never received an answer. She keeps telling me if I try to move my investments that extreme charges will kick in.

    Thank you Jim Drum [email protected]

    1. Robert DeLuccs says:

      You should search out and meet with an independent advisor that holds themselves out as Fiduciaries. Look for a CFP or CFA. Provide them with detailed account statements. There are financial professionals that can untangle poor investment product placement

    2. Hi Jim:

      I think the fact that you never received an answer is the answer. You may want to research your advisor using

  2. Jim, I have often said to my prospective clients and clients, if an adviser ever tells you that something is too complex to explain or understand, they don’t know the subject material well enough themselves or the answer is not in their best interest.

  3. George Cones says:

    Jim, you are bemoaning the “hardball tactics” of the administration, when the DOL has spent years trying to improve the playing field for ordinary investors (who’s only hope of a decent retirement is their deferred compensation plan). The oft touted argument that a small plan can not be cost efficient without the high-fees is specious. As we have seen lately some of the biggest employers have neglected their duty to provide low-cost, high-quality plans to their plan participants. Maybe more plan sponsors will wake up to the fact that they are vulnerable to litigation since they are fiduciaries, and until now their financial service provider could contend they are not fiduciaries leaving the plan sponsor twisting in the wind.

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