If you work in the financial services industry or give financial advising for 401k and other retirement investments, you likely have come across the new Department of Labor fiduciary rule. While this rule may make your job harder and increase the rules and restrictions on your day-to-day practices, it may have significant benefits for individuals and investors who carry retirement accounts.
If you need any help adapting to the new fiduciary standards, or need help understanding what these standards mean for your practice, talk to Baltimore financial services advisory attorney Ken C. Gauvey today. Ken C. Gauvey of The Law Practice of Ken C. Gauvey is a breach of fiduciary duty attorney in Baltimore, with decades of experience handling litigation cases for the financial services industry. For a free consultation, call The Heyman Law Office today.
Why the New DOL Fiduciary Rule is Bad
If you are a financial advisor, the new rules may put some severe restrictions on your financial services practice, and may open you to more risk of litigation in your operations. First, it is important to understand how this new “fiduciary duty” standard affects your job. While fiduciary duties are usually reserved for CEOs and other board members at corporations, banks, and other large institutions, the standards for financial advising were historically lower. A fiduciary has the duty to not only look out for the client’s best interests and avoid conflicts of interests, but they are held responsible for many failures and errors that someone with a lowered duty would not be responsible for.
In contrast to the old “suitability standard,” where a financial advisor’s actions were judged only as to whether they fulfilled the client’s wishes, the standard of a fiduciary puts a greater burden on the advisor. Now, you must disclose any conflicts of interest, which may include commission-based fee plans, personal investments and sponsorships, as well as other business dealings and accounts with other clients. This can quickly become a tricky hornet’s nest of potential infractions.
Additionally, the burden of switching to a fiduciary standard will be difficult for the financial services industry to cope with. First, the cost of reviewing standards and practices and rewriting guidelines could be a large undertaking. Talk to an attorney for help understanding the new standards and how they apply to you. Additionally, the cost of revising contracts and stepping away from commission-based fees where appropriate could take time and energy for financial services workers. This may mean an overhaul of contracts and pricing schemes, which could take a long time to put into motion.
There will also be confusion and litigation over the scope of these rules, since they only apply to retirement investing, but some advisors may perform multiple services simultaneously.
Benefits of the Fiduciary Rule for Retirement Investments
For investors and customers, there are potential (but unproven) benefits. The first major benefit is the transparency. While, in the past, financial advisors could ensure their own payment and financial success at the expense of your investments, they now must disclose any conflicts of interest. This may mean the investment firms now need to notify customers of potential conflicts with their own payment by commission, with receipt of gifts or contracts from conflicting clients, and regarding any other issues that may stand in the way. Failing to disclose even the slightest conflict could be considered a breach of duty and entitle a customer to sue for the harm that breach does.
Additionally, this could create more consistent and regular payment plans. While many 401k and other retirement plans are paid by commission on the investments, this may create irregular, unexpected, or unpredictable costs for customers. While commission may incentivize better investments and convince advisors to push successful investments, it may ultimately be a detriment to customers. These new rules may require the industry to switch to new payment plans, which would rely on regular annual or quarterly payments.
Lastly, the increased opportunity to remedy failed or mishandled investments is a boon to retirement investment customers. Many future retirees depend on their 401k accounts or IRAs to support them through retirement. If these funds are mishandled or poorly invested, it might not always be a breach of the previous standards for financial advisors. Now, a broader range of mishandling and other offenses becomes part of the fiduciary duty of an investor. This could give legal recourse to a cause of action for breach of fiduciary duty for those customers harmed by selfish investment advice.
Baltimore Financial Services Advisory Lawyer
William Heyman is a financial services advisory attorney in Baltimore, with years of experience in business advisory and fiduciary breach litigation. For advice on your financial services practices, or for help defending against a breach of fiduciary duty claim, call today. Alternatively, if you were harmed by the financial advice of an advisor or consultant, our attorney may be able to help file a breach of fiduciary duty claim against them. The Heyman Law Office offers free consultations to new clients. Call (443) 687-8802 today.