Haven’t brokers always owed a fiduciary duty to their clients for retirement advice?

By Robert Tobey

Many Americans were surprised by the announcement of the U.S. Department of Labor’s rule requiring financial advisors to act as fiduciaries –putting their clients’ best interest before their own when offering investment advice.

The surprise wasn’t the rule itself. It was that most Americans assumed this had been the standard all along. In recent years, there has been a shift from employee retirement assets being held primarily in professionally managed pension plans to individually managed 401(k)s and IRAs. With this shift, individuals increasingly look to their own investment advisors for advice on retirement planning.

The new rule specifies that any financial advisor being compensated for giving investment advice on 401(k)s and IRAs owes their client a fiduciary duty.  The basis for the proposal is that Americans lose about $17 billion a year to conflicts of interest with these advisors.  Under this rule, advisors have to disclose more information to their clients about the compensation they receive, including enhanced compensation for the sale of investment products issued by the brokerage firm.

Of course, the rule has generated a firestorm of controversy even before it fully goes into effect in 2018.  An unlikely coalition of industry representatives, Republicans and Democrats opposed the original version of the rule and continues to fight the Department of Labor’s revisions to the proposed rule.  According to the industry, implementation would cost $3.9 billion, greatly increasing the cost of investment services, so that only the rich would be able to afford the cost of retirement advice. In other words, savers would either have to pay more to receive the same level of advice or go it alone.

Traditionally, fiduciary duties are imposed on people who manage other people’s money, in a relationship based on trust and confidence.  In the cases of investment fraud handled by our firm, we analogize the duty of a fiduciary to a client as being like the Secret Service. It is the fiduciary’s duty to put the client’s interest above his or her own interest, just as a Secret Service agent is supposed to take a bullet for the boss.

For years, we have handled cases for investors who did not receive meaningful disclosure that the investment products they were buying cost more in fees and commissions than similar products they could buy on their own. Claims for breach of fiduciary duty were asserted in these cases.

With the shift of retirement assets to individually managed accounts, disclosure of material information about the nature and cost of investments is imperative.  While the brokerage industry acknowledges that appropriate duties of disclosure are owed by investment advisors to their clients, they don’t want to call it a fiduciary duty.

Perhaps the reluctance of the industry can be explained by the fiduciary duty definition that might be submitted to a jury or arbitration panel from the pattern jury charge:

“Because a relationship of trust and confidence existed between them, as Paul Payne’s attorney, Don Davis owed Paul Payne a fiduciary duty. To prove he complied with his duty, Don Davis must show-

  1. the transaction(s) in question was fair and equitable to Paul Payne; and
  2. Don Davis made reasonable use of the confidence that Paul Payne placed in him; and
  3. Don Davis acted in the utmost good faith and exercised the most scrupulous honesty toward Paul Payne; and
  4. Don Davis placed the interest of Paul Payne before his own, did not use the advantage of his position to gain any benefit for himself at the expense of Paul Payne, and did not place himself in any position where his self interest might conflict with his obligations as a fiduciary; and
  5. Don Davis fully and fairly disclosed all important information to Paul Payne concerning the transaction(s).” PJC 104.2.

With some research, most people could handle their own investments in a conservative fashion and do as well as a professional advisor.  Some people though, either can’t or won’t do that research and need a professional advisor.  These folks need reasonable protection.

Some critics of the rule believe calling this protection a fiduciary duty will price small investors out of the market.  But you would think the rule will lead to more discount brokerages, index and exchange-traded product providers.

Common sense would tell you that wherever there is money for investment, there are means to get it done. The last chapter on this issue is yet to be written.