The average person seeking financial advice for their retirement is unaware that the persons giving them advice are under no obligation to be loyal to their needs, to make prudent investment recommendations for them, or overall to act in their best interest. As a result, over the years many financial advisers motivated by their own self-interest have taken advantage of unsuspecting customers.
The Department of Labor sought to address the problem with the enactment of its Fiduciary Duty Rule, which was intended to represent a common-sense approach by requiring financial professionals to act in the best interests of their retirement-planning customers. Withstanding withering attacks by the United States Chamber of Commerce and 21 industry groups to kill the initiative, the DOL enacted the Fiduciary Duty Rule in 2016. But the attacks continued. One by one, the lawsuits filed by the industry were dismissed until, finally, the 5th Circuit Court of Appeals ruled, in a split 2-1 decision and over a strident dissent by the Chief Judge, to vacate the Rule. The Department of Labor declined to appeal the ruling to the Supreme Court. The 5th Circuit rejected efforts by the American Association of Retired Persons (AARP) and several states to intervene and appeal the ruling. In effect, the Rule is dead. The industry won, consumers lost.
At the same time, the United States Securities and Exchange Commission has proposed Regulation Best Interest. Not quite as robust as the DOL Fiduciary Duty Rule, Regulation Best Interest requires financial advisers to act in the investor’s best interest and exercise due care, skill and prudence when recommending investments and investment strategies. The duty the financial adviser owes is not an on-going duty to monitor the investment or investment strategy he or she recommends; it only applies at the point of the recommendation. From a practical viewpoint, the Regulation may be of little use to investors because, unlike the DOL Fiduciary Rule, Regulation Best Interest does not give investors a private right of action against stockbrokers who violation the regulation. The Securities and Exchange Commission has released the proposed regulation and is asking the public for comments. Given the opposition to the DOL Fiduciary Duty Rule, do not assume adoption of the regulation is a foregone conclusion.
So, for now, unless you live in a state whose laws impose a fiduciary duty on financial professionals (e.g. California), investors should remain wary that your financial adviser may not be taking actions that are in your best interest. Instead, they may be looking at your investment accounts as opportunities for self-enrichment.
The investment fraud lawyers at Sanford Heisler Sharp will keep you apprised of the latest developments on this regulatory front. In the meantime, if you have any questions about how your investment account is being handled, please call one our lawyers in San Diego or New York.