Retirement investors, you’re back on your own.
Just a year after it took partial effect, the so-called fiduciary rule — a requirement that financial professionals put their customers’ interests ahead of their own with retirement accounts — has effectively died.
On Thursday, a federal appeals court dealt a final blow to the rule, legal experts said. The court made effective its decision in March voiding the Obama era rule. That decision said the Department of Labor, which oversees retirement accounts, overstepped its authority. The department did not try to defend the rule after the appeals court’s initial decision, experts said, and it let a deadline pass to petition the Supreme Court to hear the case.
“This is a terrible day for retirement savers,” said Micah Hauptman, financial services counsel to the Consumer Federation of America.
The rule, drafted over six years by the Labor Department, was strongly challenged by the financial services and insurance industries even as it was being written. The industries argued that the rule would make it too costly to work with smaller investors. The rule’s future was initially called into question shortly after President Trump took office. Then, last November, the Labor Department pushed back the full application of the rule by 18 months, to July 2019.
The Department of Labor declined to comment on Friday. Nor did it provide any guidance on what rules now apply to retirement accounts.
“It seems that even the D.O.L., through its silence, is taking the position that the rule is dead,” said Arthur Laby, a professor at Rutgers Law School and expert in fiduciary law.
Generally speaking, brokers must make recommendations that are deemed “suitable,” which is a less stringent requirement than a fiduciary standard. The Labor Department rule would have required financial professionals, including brokers and insurance agents, to adhere to the higher standard when providing advice related to their tax-advantaged retirement accounts, like individual retirement accounts.
What remains unclear is whether the fiduciary rule will leave any imprint. Financial services firms had begun to make changes in the way they did business in anticipation of the rule. Raymond James, for example, had said it would alter the way it paid some brokers to lessen conflicts of interest. But the firm declined to comment on Friday on whether it would follow through with those plans.
Mutual fund companies, including Capital Group’s American Funds, had created a new class of shares — known as clean or unbundled shares — that removed layers of fees that would have been paid to the broker.
“There is definitely not the momentum there would have been with the fiduciary rule looming,” said Aron Szapiro, director of policy research for Morningstar, “but they are far from dead.”
The spotlight will shift to the Securities and Exchange Commission, which in April proposed its own “best interest” standard, a rule that one agency commissioner described as an enhancement of the status quo. Consumer advocates have long said that the financial services industry wanted the S.E.C. to write any new rule because it was expected to be more industry-friendly. That process is still in its early days.
Regardless of what happens, consumers may want to heed the words of Phyllis Borzi, an assistant secretary of labor during the Obama administration who helped lead the effort to draft the original fiduciary rule.
“When somebody is trying to give you advice, what you do is ask them if they are legally obligated to act in your best interest and as a fiduciary,” Ms. Borzi said. “If they say yes, or any euphemism that can be construed as a yes, then ask them to put it in writing.”
Alain Delaqueriere contributed research.