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Sunday, October 17, 2021

Pros and Cons of State Fiduciary Rule Initiatives

In 2019 with the DOL’s fiduciary rule in the ground, individual states are starting to pick up the mantle. Is this ongoing trend a positive or a negative one? Here are a few ideas for you to consider first:


Small scale testing

Looking back at the old DOL rule, there was a lot of debate about its effects from many different stakeholders. This is to be expected because there is a high level of uncertainty about what the long term effects of such a policy will be.

The advantage of having fiduciary rules on a state by state basis is that different states can experiment with different variations. This will allow small scale testing of which policy delivers the best outcomes rather than subjecting the entire country to a single policy. State will then be able to adjust their policies to model the other states which had the best outcomes.

State based fiduciary rules avoid the risk of having all the eggs in one basket, because if there is a flaw with a nationwide rule then everyone will suffer.

More Options

Since some states (Nevada, Maryland, etc.) started to propose their own fiduciary rules soon after the Department of Labor’s uniform rule of conduct was cancelled last year, it’s getting obvious that specific states are looking for protection of their investors and retirees. No federal law can guarantee that as much as local rules, because each state legislature includes too many nuances not specific for any other state. Hence it makes it far more difficult for the national law to provide the best practices that could regulate fiduciaries’ rights and responsibilities on a state level.

According to Kenneth Bentsen, President and CEO of the Securities Industry and Financial Markets Association (SIFMA), creating individual state laws is not the best way to handle the situation, because a common nationwide, best interest fiduciary standard provided by the SEC would be more preferable than any state laws and rules that could result in investor confusion, less access to information and choice of investor products. However, a uniform federal law would provide more options for retirees and investors, whether it concerns fee-for-service model or commission-based services.

Back to the (DOL Fiduciary Rule) Future

The pro argument states need to advance their own fiduciary standard can be based on the same premise as proposed by the original DOL fiduciary rule scheduled to be phased in from April 10, 2017, to January 1, 2018. As of June 21, 2018, The U.S. Fifth Circuit Court of Appeals officially vacated the rule, effectively killing it. The fiduciary rule would serve investors who will be seeking advice about financial planning by protecting their best interest. It is well investigated and documented that a lot of consumers who seek financial advice simply do not know enough about the industry and its processes to make good decisions. So, they put their trust in the advisers they hire. Asking advisers to act in the best interest of the client is absolutely a norm which everyone should support and honor.


Lowest Common Denominator

If a firm has offices in many states and each state has different levels of fiduciary standards, then a firm may have to endure increased costs associated with the administration. However, what is likely to happen is that firms will adopt one policy nationwide to help reduce these costs. If there are 50 different fiduciary rules, which one will a firm choose to follow?

What might happen is that one state will have a stricter version of the fiduciary rule than another state. These companies will have to adopt the strictest version of the rule so that they are covered in that state plus all the less strict states.

This can be a problem because it will subject the nationwide firms, not necessarily to the best version of the rule, but, to the whims of whichever state decides to be the most regulative.

More State Rules, More Problems.

As states all start to add their own versions of the fiduciary rule, one of the biggest potential problems is how purely complicated things can become with even more regulation. While the concept of the regulation itself when the DOL was doing it made broker-dealers everywhere in fear, now it has the chance to be even more of a massive bureaucratic burden. When the DOL was going forward with their rule, at least there would be only one set of regulation for these parties to understand and adapt to, but with each state making their own rule this will be multiplied even more.

Each state will have its own specific regulation that broker-dealers will need to adapt to in that space, each with its own loopholes and exceptions to understand. In general, this could even confuse laymen investors even more because there will be so many different concepts of what an “advisor” is and who they can trust as a fiduciary. Sticking with just one fiduciary rule form the DOL may have been a good idea at the heart of it, but with more rules will come even more problems.

More Red Tape

The major con is imposed by the core of Fiduciary Duty term and consequently raised explicit requirements. The new rules may put some severe restrictions on financial services practices and may open financial advisors and planners to more risk of litigation in clients operations. It is obvious that new standards will put a greater burden on the advisors of all sorts. An overhauling of contracts and pricing schemes, as well as the reviewing standards and practices and rewriting guidelines,  could cost a significant amount of time and effort from financial services workers, bringing forth more confusion and leaving them vulnerable to court challenges.


Whether you’re in favor of having this kind of fiduciary rule enforced or not, it’s unquestionably going to bring in more bureaucratic red-tape. As ever, a clearer fiduciary standard will be helpful for the common investor on distinguishing a broker from an RIA, but is going with individual state regulation the right path? That’s a question we’ll soon be finding out in 2019.


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