Regardless of specific court rules about the Department of Labor fiduciary rule, moves towards higher standards aren't going to stop, industry figures say.

Recent conflicting US court decisions have thrown doubts on how the US wealth industry upholds fiduciary duties to clients – but practitioners say they intend to keep pushing forward what they see as higher standards regardless of legal twists.

The status of the Department of Labor’s final regulation expanding the scope of fiduciary status due to “render[ing] investment advice for a fee” and its accompanying prohibited transaction exemptions appears to have hit a speedbump after conflicting decisions handed down last week from two US Courts of Appeals. The Tenth Circuit upheld the Fiduciary Rule following a procedural challenge regarding its application to fixed indexed annuity sales. However, the Fifth Circuit reacted rapidly with a decision rejecting the premise of the Fiduciary Rule and vacating it entirely.

The fiduciary rule requires brokers to act in the “best interests” of their clients; the rollout of this rule, taking effect in stages, has seen firms such as Merrill Lynch push towards fee-based advice and away from its previous sales-driven commission model. Some firms, such as Morgan Stanley, are retaining a menu of options for clients in terms of how they want pay for services. In general, the DoL rule is seen as encouraging fee-based advice of a kind that has also taken place in the UK, following the Retail Distribution Review changes kicking in from 2013. 

The fee-based financial advisory market nearly doubled in the six years ending in 2016 to $9 trillion, according to Cerulli Associates, which has predicted will surge to nearly $13 trillion by 2019, suggesting clients are already voting with their feet.

“We have long advocated for a `harmonized’ best interest standard, with consistent and clear rules, when advisors provide personalized investment advice to retail clients in any account. We have also encouraged close coordination among regulators to achieve such a standard, and we are confident that our approach will be consistent with the measures they will ultimately adopt,” Andy Sieg, head of Merrill Lynch Wealth Management, said in an internal memo shown to this publication. 

“As announced...the US Court of Appeals for the Fifth Circuit has ruled to strike down the Department of Labor (DoL) Fiduciary Rule in its entirety. While there is uncertainty regarding the DoL’s next steps in light of this decision, our core strategy - consistent with our principles - remains that we always will act in our clients’ best interest,” the memo added.

“Advisors who are genuine fiduciaries don’t need to do anything - they are already acting in their clients’ best interests. Advisors who do not uphold a fiduciary duty should be prepared for clients to question their compensation models. And anyone who asks an advisor if they are a fiduciary and does not hear an unqualified `yes, I am a fiduciary and I have a legal duty to put your interest first’ should seriously consider their options,” Elliot Weissbluth, chief executive of HighTower, the wealth management group, told this publication. 

“Regardless of what happens with the DOL rule itself, our industry needs to make an unambiguous commitment to upholding a fiduciary duty to our clients. If the law does not demand that advisors act in their clients’ best interests, the clients will. It’s a shame that we’re having an argument over the righteousness of whether advisors who look after clients’ financial wellbeing should have to uphold a fiduciary duty. As a society, we don’t question that doctors and lawyers should put their patients’ and clients’ best interests first, and we should require the same of financial advisors,” Weissbluth continued.

“People need to recognize that Wall Street and corporate influences who are opposed to the fiduciary rule have an economic interest in not putting the clients’ best interests first. There are plenty of successful commercial enterprises, doctors, lawyers, etc. that uphold the fiduciary standard. The financial services industry should not be exempted from doing right by its clients in order to drive its own financial gains,” he added.

Marthin De Beer, founder and CEO at BrightPlan, a digital financial advisor certified by CEFEX as a fiduciary, said: “Clients would be wise to have discussions with their current advisors to determine to what standard they are being held: suitability or fiduciary.”

“Think of these standards like car salesmen. The “suitability” salesman is out to make the maximum commission he can on every sale. He checks the minimum number of his customers’ boxes that allow him to make maximum profit. The “fiduciary” salesman, on the other hand, acts in his customers’ best interest. He focuses not on the money he’ll make from the sale, but on which vehicle actually checks as many of the customers’ boxes as possible while getting them the best price. As for advisors, those who already act in a fiduciary capacity for clients really don’t have much to do to prepare—aside from ensuring that their processes for documenting their fulfilment of fiduciary duties aligns with new regulations, should the ruling pass. For us as fiduciaries certified by CEFEX (Centre for Fiduciary Excellence), it is business as usual.”

“At one point in time, the term `fiduciary’ was once considered a term that many weren’t familiar with outside of the financial services industry. However, today, `fiduciary’ has made it into our everyday lexicon and we’re happy to see the public’s interest in educating themselves about what the different standards are and the level of service they deserve when it comes to financial advice,” De Beer continued. 

“As the wealth management landscape shifts towards digitization, part of the industry’s due diligence must be educating consumers about which types of technology tools truly are ‘advisors’ and, as a result, are held to the same fiduciary standard as traditional RIAs. There is a common misconception that every investment app and ‘robo advisor’ in our industry has the same commitment to providing fiduciary advice, but that’s not the case,” he said.

Allison Brecher, general Counsel at Vestwell, a digital retirement platform, added: “The ruling by the Fifth Circuit is a major victory for some in the financial services industry. It was unexpected, especially since other courts generally supported the rule and the appellate court declined to block the rule while the case was on appeal. The scope of the Fifth Circuit's ruling is unclear as is whether the DOL will appeal and whether the Supreme Court will rule on it.”

“Firms and advisers who followed the DOL’s direction last year should be wary of undoing that work based upon a Fifth Circuit decision that may very well be on its way to the Supreme Court. It may be better for them to stay the course for now. Unfortunately, that leaves consumers without sufficient protection for their retirement and other assets.  Many consumers do not understand the distinctions between a `salesperson’ and `advisor’ with fiduciary responsibility. In a world of retirement accounts with multiple plan options and often confusing language about fees and costs, consumers need guidance and that should not come from misguided salespeople with inadequate experience who may be heavily incentivized not to act in the consumer's best interests,” she said, adding that the legal wrangle is likely to be finally handled by the US Supreme Court.