Investors beware. You will now have to determine whether your financial adviser is managing your retirement money with your — or his own — best interests at heart. That’s because a federal court two weeks ago threw out an Obama-era Department of Labor rule requiring financial advisers to put customers’ financial interests ahead of their own.
The rule was intended to protect small-scale investors from financial professionals, including brokers and insurance agents, who wheel and deal with clients’ money and profit personally on transactions that aren’t always in the clients’ best interests. The Trump administration delayed full compliance with the rule until next year and has not enforced it.
Many advisers say their clients’ interests always come first and that they don’t need overly cumbersome Labor Department rules ordering them to do so. Good for them. But some might make commissions off the sale of products without telling their clients that other, potentially better, options are available.
In overturning a Dallas district court that supported the rule, the divided 5th Circuit Court of Appeals said the rule was unreasonable and that only in the Labor Department’s “semantically created world do salespeople and insurance brokers have ‘authority’ or ‘responsibility’ to ‘render investment advice.’ ” In a 2-to-1 decision, the court found fault with the rule’s broader standard of what is considered financial advice, who provides it and how the Labor Department regulates it.
The consumer-protection rule was created in 2016 despite fierce pushback. Some in the investment industry said it was too burdensome and could result in higher costs for investment advice, or that advisers would turn away smaller investors.
The department devised the rule out of concern that the increased popularity of individual retirement accounts attracts clients who can be duped into dubious transactions by advisers with conflicts of interest. One example is that an adviser sells a client a fund charging a 2 percent sales fee, and doesn’t offer similar products with lower fees.
Heidi Shierholz, senior economist with the nonprofit Economic Policy Institute, says investors acting on advice from nefarious advisers will lose an estimated $23 billion a year.
The biggest complaint was that the rule was regulatory overreach and would harm the very people it was intended to help. Opponents of the rule want the more industry-friendly Securities and Exchange Commission to regulate financial advisers.
Financial and legal experts say the legal fight will probably go to the Supreme Court. Firms that improved their practices to meet the rule’s requirements say they’re unlikely to go back to their old ways. Sadly, others still need government nudging to do the right thing.