WHO WON? Last week, the Department of Labor issued new rules, saying financial advisors have a fiduciary duty when advising clients on how to handle their retirement accounts, such as 401(k) plans and individual retirement accounts. This fiduciary duty means advisors must act in a client’s best interest.
For registered investment advisors, or RIAs, this wasn’t an issue: These advisors, who typically get compensated through fees, were already held to a fiduciary standard. But it was a big deal for brokers, who usually charge commissions and were previously held to a lower standard: Under the old rules, they only had to recommend investments that were considered suitable.
A resounding victory for everyday investors? Maybe not. The Labor Department rules still allow brokers to sell their firm’s own proprietary investment products, an obvious conflict of interest. They can also advise retirement-account clients to buy illiquid investments like non-traded real-estate investment trusts and to purchase tax-deferred annuities, as long as this is somehow in the client’s best interest.
Stuffing a variable or equity-indexed annuity inside an IRA has long been a ploy used by brokers seeking to increase their commissions, because annuity commissions are typically higher than those on regular mutual funds. But the benefit to clients is less obvious, because they end up with an annuity—a tax-deferred investment vehicle—inside an IRA, which is also a tax-deferred vehicle.
Maybe brokerage-firm lawyers and compliance officers will decide it’s hard to justify stunts like this under the new rules, and they’ll put a stop to such transactions. But even if that happens, brokerage-firm clients still need to be leery. Their brokers might act as fiduciaries when handing clients’ IRAs. But when advising clients on their regular taxable account, these brokers may be held to the lower suitability standard.
All of this means the new rules are a mixed blessing for investors. But the biggest loser, I fear, is the term “fiduciary” itself. Before the Labor Department ruling, it was a label proudly worn by registered investment advisors, and signified that—unlike brokers—they acted in the best interest of their clients. But now, it isn’t clear what the label means.