Fiduciary Quandary: States Rewrite the Rules on Who’s a Fiduciary

Fiduciary Quandary: States Rewrite the Rules on Who’s a Fiduciary

After the US Department of Labor’s (DOL) Fiduciary Duty rule was struck down by a federal appeals court in 2018, the federal government has yet to issue another iteration of the rule. However, a handful of states are attempting to create a robust standard.

What is the Fiduciary Standard?

The fiduciary standard elevates certain financial personnel to be “fiduciaries”. This designation generally requires financial professionals to act in the best interest of the client and avoid charging excessively for their services.

In addition to government regulation, some agencies hold their members to the fiduciary standard as a requirement of membership. Examples of financial professionals held to a fiduciary standard include:

  • portfolio managers
  • Certified Financial Advisors (CFAs)
  • Certified Financial Planners (CFPs)

Department of Labor’s Fiduciary Standard Gets Tossed

In April 2016, the DOL released a final Fiduciary Duty rule to address conflicts of interest present in retirement advice for retirement investment plans, which were estimated to cost retirement plan participants $17 billion each year. The rule required most sellers and managers of retirement products to be held to a "fiduciary" standard, which requires disclosure of all commissions, fees, and conflicts of interest. The rule also permitted use of disclosures to offer some products that may entail a conflict of interest.

After a series of delays and multiple lawsuits by industry groups, the rule was struck down by a federal appeals court in June 2018. Nonetheless, the DOL intends to release revised regulations in September 2019 to avoid the legal complications the first rule faced. In addition, the Securities and Exchange Commission (SEC) is currently formulating a rule to regulate retirement advice providers, also due to be released in September 2019, though the rule is unlikely to force brokers to be held to a fiduciary standard.

States Step In

Multiple states have attempted to implement rules holding certain individuals to the fiduciary standard to complement or build on federal standards, particularly as the proposed federal rule was hampered by the courts. More prominent examples include:

  • In June 2017, the Governor of Connecticut signed a law requiring any company administrating a retirement plan for public employees to disclose fees and return ratios for retirement investments and fees for individuals providing investment advice to plan participants.
  • In July 2018, the New York State Department of Financial Services approved an amendment to impose a “best interest” standard on the sale of life insurance and annuity contracts.
  • In January 2019, the Nevada Securities Division released a notice of draft regulation that would require all professionals that create financial plans for clients to be held to the fiduciary standard. The rule is currently being finalized after industry commentary.
  • In February 2019, four state senators in the Maryland State Senate proposed Senate Bill 786, which expanded fiduciary responsibility to brokers, broker agents, investment advisors, investment advisory representatives, and insurance providers. The bill was defeated in committee.
  • In April 2019, the New Jersey Division of Consumer Affairs released a rule proposal for public review. The proposal requires brokers to be held to a fiduciary standard, alongside investment advisors. The rule is currently open for public commentary until mid-June 2019.

In addition to these measures, California, Missouri, South Carolina, and South Dakota all effectively have a fiduciary standard for brokers due to state court rulings.

Industry Response

Financial product providers generally oppose state efforts to introduce the fiduciary standard to a wider range of financial products; for example, Morgan Stanley threatened to remove brokerage services from Nevada in response to the regulations promulgated there, citing concern over a lack of profitability for some of its services. Wells Fargo, Edward Jones, and Charles Schwab all warned that they may reduce the investment products available in the state. Brokerage firms may also sue to attempt to stop implementation of the proposed state rules.

The likelihood of most proposed rules getting tied up in lawsuits seems high. Meanwhile, the debate surrounding these rules may cause increased scrutiny into the ways that brokerage, insurance, investment, and retirement planning service providers are compensated.

Want to Learn More?

We have you covered! For additional information and analysis of US industry trends, see Professional Services: United States. This report forecasts to 2023 personal consumption expenditures (PCE) on professional services in nominal US dollars. Expenditures are segmented by service type in terms of:

  • portfolio management and investment advice
  • legal
  • banking
  • securities trading
  • tax preparation and accounting
  • other services such as employment placement, printing, and private parcel mail

To illustrate historical trends, total PCE, the various segments, and price indexes by segment are provided in annual series from 2008 to 2018.

The scope of this report encompasses fees and service charges paid by consumers for professional services. Also included are the fees paid by third parties on behalf of consumers (e.g., fees for retirement plans paid by employers). Spending on interest is excluded. Also excluded is the value of financial services furnished without payment (e.g., free checking accounts).

PCE data include spending by nonprofit institutions serving households (e.g., the value of education services provided by nonprofit colleges or medical care provided by nonprofit hospitals). Consequently, the spending by such parties on portfolio management fees, banking, legal, and other professional services is included.

While you’re there, check out our related reports, which include:

About the Author

Owen Stuart is a Market Research Analyst with Freedonia Focus Reports. He conducts research and writes a variety of Focus Reports, and his experience as an analyst covers multiple industries.