Impact of Department of Labor fiduciary rule

Mar 20, 2018
The shift to best-interest advice will continue, with or without regulators’ help.

This post by Aron Szapiro, director of policy research at Morningstar Inc, first appeared on Morningstar blog.

The future of the Department of Labor’s fiduciary rule just got murkier.

A panel of the 5th Circuit Court of Appeals struck down the rule on Thursday. The Labor Department could appeal to the U.S. Supreme Court, ask the full 5th Circuit to reconsider, or revise the rule to focus on areas where they have clearer legal authority and ongoing concerns, such as the advice being given to small plans.

The fiduciary rule has been in partial effect since June 2017. But it’s accelerated an ongoing, irreversible trend: Clients are increasingly demanding advice in their best interests, and many advisers are changing their business models to deliver it.

The rule has already spurred many financial institutions to examine their conflicts of interest and to take steps to provide best-interest advice. This focus on best-interest advice is a global trend, driven by the maturation of the defined-contribution system. With more individuals responsible for their retirement savings, policymakers have been increasingly interested in ensuring investors get the advice they need to succeed in achieving a secure retirement.

The The Securities and Exchange Commission also continues to make progress on its advice rule. In public statements, Chairman Jay Clayton has said the draft version of a uniform advice standard will be ready by the end of June and won’t be merely a “disclosure-based” standard. Given that the DOL rule was partially delayed and the widespread assumption was that DOL would craft an exemptive class for anyone following the SEC rule, this court decision may not make that much difference.

What does the appellate court’s ruling mean for advisers? 

It’s hard to say where the dust will settle with so many moving parts—an SEC rule on the horizon, more uncertainty with the DOL rule, and perhaps even congressional intervention.

However, one thing is clear: Investors are moving toward advisers who put their interests first and manage their conflicts of interest. And, many financial institutions have responded to these investors and the DOL rule by changing their business models.

Further, assuming this court decision means the SEC takes over as the primary regulator of advice, it could be good for advisers. The SEC could normalize treatment between taxable and nontaxable accounts for registered investment advisers and broker/dealers giving advice to retail investors.

For the most part, investors with The Employee Retirement Income Security Act of 1974 protections can sue in federal court if their fiduciary fails to act in their best interests. But the SEC regulates advice pursuant to the Investment Advisers Act of 1940, which does not generally allow investors a court remedy, except in some unusual cases.

The DOL’s fiduciary rule was expected to set up an enforcement mechanism that would have left financial institutions subject to class action lawsuits in state courts. This was a key issue in the 5th Circuit Court of Appeals decision, in which the panel ruled that the Labor Department overstepped its authority.

Regardless, we think the shift to best-interest advice will continue, with or without a tailwind from regulators.

Add a Comment
Please login or register to post a comment.
© Copyright 2024 Morningstar, Inc. All rights reserved.
Terms of Use    Privacy Policy
© Copyright 2024 Morningstar, Inc. All rights reserved. Please read our Terms of Use above. This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
As of December 1st, 2023, the ESG-related information, methodologies, tools, ratings, data and opinions contained or reflected herein are not directed to or intended for use or distribution to India-based clients or users and their distribution to Indian resident individuals or entities is not permitted, and Morningstar/Sustainalytics accepts no responsibility or liability whatsoever for the actions of third parties in this respect.
Company: Morningstar India Private Limited; Regd. Office: 9th floor, Platinum Technopark, Plot No. 17/18, Sector 30A, Vashi, Navi Mumbai – 400705, Maharashtra, India; CIN: U72300MH2004PTC245103; Telephone No.: +91-22-61217100; Fax No.: +91-22-61217200; Contact: Morningstar India Help Desk (e-mail: in case of queries or grievances.