After a long wait, the Department of Labor has announced it is ready to finalize its fiduciary duty rule as early as this week. Under this rule, brokers will be considered fiduciaries of their clients, meaning that they will be legally bound to act in their best interests. The proposed rule has been extremely controversial. At first blush, it’s difficult to see why. After all, its proponents argue, don’t you want your broker acting in your best interest?
But the reality is not so simple. There is a difference between a broker choosing to act in a client’s best interest and being legally obliged to do so. And the difference will likely mean that many investors, in particular low- and middle-income investors, will lose out.
Under existing rules, brokers are bound to a suitability standard. This means that if they offer you a product it must be suitable for your needs. If you’re an 80 year old retiree, a fund full of high-risk equities is probably not suitable for you. But as long as the products are suitable, a broker is free to recommend one fund over another, even if the broker’s reason for making the recommendation is that the recommended fund will provide a better commission, not because it’s a better investment for you.
Since many brokers already put their clients’ interests first, isn’t this just holding everyone to the practices of the best brokers?