The Fiduciary Standard is Dead? Long Live the Fiduciary Standard!

A lot of people have asked me about the impact of the recent election on the future of the fiduciary standard. My answer is always in two parts – one based on existing legal precedent, the other on the DOL’s recent rule and the SEC’s possible adoption of a similar rule.

From the DOL/SEC standpoint, no one knows for sure what impact the election will have on a fiduciary standard. Based on some of Mr. Trump’s early choices for key positions and early statements from Congress the future of a universal fiduciary do not appear to be promising.

From the legal standpoint, the law has long recognized the requirements of a fiduciary’s duties, especially with regard to the fiduciary duties of loyalty and prudence. In interpreting and enforcing those duties, the courts and the regulators typically look to the Restatement of Trusts and existing case-law applying the Restatement’s principles. Breaches of one’s fiduciary duties are generally based on a fiduciary’s failure to adhere to the so-called “prudent person” standard – how would a prudent person handle similar situations.

The recent election, both in terms of the Presidential and Congressional results, are simply not going to change existing fiduciary precedent. I think that is one of the reasons some of the major broker-dealers are being proactive and announcing changes to some of their business platforms in favor of fiduciary friendly practices.

From a potential liability standpoint, the investment industry needs to recognize that the courts have shown an increasing willingness to impose a fiduciary standard on brokers where the courts perceive the need to do so in order to protect inexperienced investors from unethical brokers who have taken control over an investor’s account. As the courts have stated

The touchstone is whether or not the customer has sufficient intelligence and understanding to evaluate the broker’s recommendations and to reject one when he thinks it unsuitable.

As a result, many of the statements from the investment industry factions expressing a belief in the death of both the DOL’s new fiduciary rule and the SEC’s adoption of a similar rule are shortsighted and indicate nothing more than a false sense of security. In fact, all of the public discussion about the DOL’s fiduciary standard and the need for greater transparency may have increased public awareness of such issues, resulting in increased litigation based on alleged breaches of one’s fiduciary duties.

As I tell people, regardless of what becomes of the DOL’s fiduciary rule, the mission may have been accomplished by increasing the public’s awareness of certain unethical and/or inequitable practices in the investment industry  and their need to be more proactive in protecting their financial interests. The decision by some broker-dealers to adopt more fiduciary friendly practices is simply a wise business decision, as it gives them a sound marketing platform and arguably reduces potential liability exposure if such practices are actually implemented and followed.

Prudent investment advisers will recognize this new emphasis on greater transparency and use their existing fiduciary duties as a marketing tool. This was the message before the DOL acted and should always be the message. Since registered investment advisers have long been held to be fiduciaries, such advisers should always use their legal obligations as fiduciaries to differentiate themselves from non-fiduciary competitors and to educate the public on the advantages such legal obligations provide for investors.




About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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