While the brokerage sector of the financial services industry celebrates, many advisors responded with confusion and frustration after a federal appeals court struck down the Department of Labor’s fiduciary rule on Thursday.
Industry organizations, watchdogs and pro-fiduciary advisors expressed their disappointment in the decision in public statements on social media.
Knut Rostad, president of the Institute for the Fiduciary Standard, did not hold back his dismay in a Friday e-mail:
“The [Fifth] Circuit’s decision is a national tragedy,” Rostad wrote. “Its harms are well known, predictable and calculable. No mystery as to how they’ll hit American savers. The decision deserves its own march on Washington.”
The federal Fifth Circuit Court of Appeals in Dallas voted 2-to-1 on Thursday to strike down the DOL’s fiduciary rule, with the majority ruling that the agency abused its regulatory powers in creating the rule.
The lawsuit was brought by industry organizations opposing the rule, including SIFMA, the U.S. Chamber of Commerce and the Financial Services Institute (FSI), which represents the independent broker-dealer industry.
“The court has ruled on the side of America’s retirement savers, preserving access to affordable financial advice,” wrote the plaintiffs in a joint statement. “Our organizations have long supported the development of a best-interest standard of care and the Securities and Exchange Commission should now take the lead on a clear, consistent and workable standard that does not limit choice for investors.”
It's not yet known whether the DOL will choose to appeal the decision to the U.S. Supreme Court or ask that the matter be heard by the full Fifth Circuit Court. It is notable, however, that President Donald Trump and many of his appointees have spoken critically of the DOL’s regulation.
Greg Valliere, chief global strategist for Charlotte-based Horizon Investments, said that the rule would likely be “in limbo” until the DOL decides to appeal or until the SEC moves forward with its own fiduciary rule.
“Our guess is that the original proposal will never be fully implemented; its legacy may be that while it burdened small firms, it has prompted tougher self-regulation by the industry as a whole,” wrote Valliere.
Critics of the DOL’s rule argued that it would shrink the financial advice industry, ultimately reducing retirement savers’ access to financial planning and investment advice.
In a joint statement, leaders of the American Council of Life Insurers (ACLI) and the National Association of Insurance and Financial Advisors (NAIFA) applauded the court’s decision, but acknowledged that the industry needed some sort of best-interest rule to guide its professionals.
“The court’s decision will help ensure that retirement savers maintain access to a wide range of financial planning services and products, including annuities, which are the only financial products in the marketplace that guarantee lifetime income,” wrote the organizations. “While we agree with the decision, we recognize that the courts are not the appropriate forum for policymaking. ACLI and NAIFA support reasonable and appropriately tailored rules that require all sale professionals to act in the best interest of their customers.”
After the decision, some advisors took to Twitter to express their displeasure:
“A dark day for consumers and real financial advisors, not only for the overturning of the Fiduciary (sic) rule.. also takes pressure off the SEC,” wrote Michael Kitces, director of financial planning research at Columbia, Md.-based Pinnacle Advisory Group.
“It sickens me that the #FiduciaryRule is going to be scuttled. The good news? The cat is out of the bag and more people look for fiduciary advice. We will win this war,” wrote Carolyn McClanahan of Jacksonville, Fla.-based Life Wealth Partners.
Full implementation and enforcement of the fiduciary rule was delayed to 2019 after President Donald Trump requested that the DOL review its fiduciary rule before enforcing it. The rule has remained partially implemented in the interim leading up to Thursday’s decision.
On Friday morning, some advisors were unsure what the ruling would mean for the fiduciary rule in the long term.
“This news causes further confusion surrounding the DOL rule and whether it will be implemented or not,” said Joe Heider, president of Cleveland-based Cirrus Wealth Management. “The question moving forward will be whether the SEC attempts to create a unified approach with regard to what is a fiduciary as it relates to advice on IRAs and retirement plans or if this will ultimately be decided by the U.S. Supreme Court."
He noted that many practitioners have already forged ahead in adopting a best-interest standard.
"No matter how this is resolved, most RIAs and advisors have modified their practices in anticipation that the DOL rule would be implemented," Heider said. "There's been many changes and this will have to be resolved to bring uniformity to the industry. “
The court’s ruling overturns a 2017 decision by a Dallas U.S. District Court that upheld the fiduciary rule.
The fiduciary rule’s best-interest contract provision, which would allow brokers to receive commissions and provide conflicted recommendations as long as they signed an agreement to act in the client’s best interest, was found by the majojrity opinion in the Fifth Circuit devision to expand the DOL’s authority beyond the scope of ERISA .
Blaine Aikin, executive chairmam of Pittsburgh-based Fi360 and a prominent fiduciary advocate, said that the industry should look to the SEC for fiduciary reforms.
"Given the uncertainty with regard to compliance and liability concerns, as well as investor protection under the DOL’s fiduciary rule, we urge the Securities and Exchange Commission to continue to work closely with the DOL in drafting a standard across regulatory jurisdictions that is principles-based and requires advisors to act in the best interest of the client without regard to their own financial interests,” said Aikin in released comments.