As the media and public continue to be mesmerized by drama at the White House and Facebook, those in Harvest’s community had a news shocker of our own last week.
On March 15, the Fifth Circuit Court of Appeals ruled that the Department of Labor “overstepped its authority” when creating the Fiduciary Rule, a standard that requires financial advisors to put their clients’ interests ahead of their own when handling retirement accounts.
Many Harvest’s readers are financial advisors, so this development will have a significant impact on their clients’ portfolios, product lineups and practice management.
(For more information, Jean-David Larson of Russell Investments offers some great technical insights this week on Harvest, while Josh Brown and Anthony Isola at Ritholtz Wealth Management vehemently lament the Court’s decision.)
Barring further appeals, the new ruling will go into effect May 7 as if the rule never existed in the first place from a regulatory standpoint, according to Russell’s Larson.
Not So Fast…
Despite the ruling, I do not foresee the industry turning back the clock to a time when the industry developed a negative reputation for product pushing over holistic financial planning. Clients have come to expect a higher standard of care regardless of regulations, and advisors are anxious to give it to them.
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From Harvest’s standpoint, advisors are practically banging down our doors for more practice management content, a signal that there is a genuine desire to serve clients optimally.
Before the Trump administration's delay in the rule’s implementation, brokerage firms and RIAs shifted their business models anticipating the rule coming to be. Many firms, including the biggest wirehouses, moved from commission-based to fee-based accounts and began adopting fiduciary-like practices to align incentives with clients better. The introduction of robo-advisors and visually appealing consumer tech interfaces helped accelerate this.
While front-end tech tools keep investor clients better engaged, do not underestimate what is coming on the back-end. Two months ago, I wrote about how blockchain will be crucial to a financial advisor's life, keeping an unimpeachable record of clients' circumstances, and allowing AI and machine learning to come up with both content and investment solutions that best suit them. No court ruling will stop this progress.
The fiduciary debate of the past few years has engendered intense arguments from the brokerage industry and consumer advocates alike, and it will likely continue well after the current ruling goes into effect. But given that we live in a customer-centric, Amazon-conditioned world, investors should demand more in the coming years.