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Commentary

Court Ruling Won't Stop Best-Interest Advice

An appellate court's ruling to strike down the Department of Labor's fiduciary rule doesn't change our view that in the long-run advisors are moving to a fiduciary standard of care.

A panel of the 5th U.S. Circuit Court of Appeals struck down the Department of Labor's fiduciary rule on Thursday. 

While it is certainly true that this decision adds a bit more uncertainty to an already muddled situation for the DOL rule, it is important to keep the future of the rule and the future of best-interest advice separate. The rule had been delayed already and the agency was already likely to revise it. It must now also decide whether to appeal to the Supreme Court, ask the full 5th Circuit to reconsider, or revise the rule to focus on areas where it has clearer legal authority and ongoing concerns, such as the advice being given to small plans.

Over the past 18 months, the DOL's rule accelerated an ongoing, irreversible trend: Clients are increasingly demanding advice in their best interests, and many advisors are changing their business models to deliver it. The rule has already spurred many financial institutions to examine their conflicts of interest and to take steps to provide best-interest advice. This focus on best-interest advice is a global trend, driven by the maturation of the defined contribution system. With more and more ordinary people responsible for their own retirement pensions, policymakers have been increasingly interested in ensuring investors get the advice they need to succeed in achieving a secure retirement.

The SEC also continues to make progress on its advice rule. In public statements, Chair Jay Clayton has said the draft version of a uniform advice standard will be ready by the end of June and will not be merely a "disclosure-based" standard. Given that the DOL rule was partially delayed and the widespread assumption was that the agency would craft an exemptive class for anyone following the SEC rule, this court decision may not make that much difference.

As an investor, what does all this mean for you?

For at least a little bit longer, investors should be aware that the legal standards of conduct for advice given on investments in 401(k) and other defined contribution retirement accounts is higher than advice outside of these employer-sponsored accounts, such as with IRAs. To make things more complicated, registered investment advisers (RIAs--note the "e" rather than "o") and advisors at broker-dealers follow different standards.

In the short term, investors should keep asking questions such as, are you a fiduciary, and how does your firm manage conflicts of interest?

Over the longer term, the dust will eventually settle, and there will likely be a uniform standard that encourages advisors to put their clients' interests first.

Learn more about how Morningstar helps advisors provide best-interest advice to their clients.