Personal Finance

Labor Dept. to investors: Watch your back as court dismantles protection rule

Key Points
  • The Labor Department will not pursue claims against financial advisors working in good faith to give advice in the best interest of the investor.
  • A March decision from 5th Circuit Court of Appeals struck down the investor protection rule.
  • You are your own best line of defense against bad actors.
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An anticipated court ruling threatens to finally do away with an Obama-era investor protection rule, leaving investors as their own best line of defense to protect their retirement savings.

Federal regulators expect the 5th Circuit Court of Appeals to finalize a ruling this week that would strike down the Labor Department's embattled "fiduciary rule."

This rule requires advisors and brokers to put their clients' interests before their own when giving advice over retirement accounts.

For investors, it's business as usual: You are still responsible for making sure your financial advisor has your best interests at heart.

"It's a buyer-beware world, and you are on your own," said Micah Hauptman, financial services counsel at the Consumer Federation of America. "You shouldn't expect that your financial professional is serving your best interests unless they willingly state that they are fiduciaries."

Here's what you need to know.

Confusion remains

Photo by Mint Images via Getty Images

On March 15, the 5th Circuit ruled that the Labor Department exceeded its authority by drafting the fiduciary rule, and vacated the regulation.

The department had until April 30 to appeal the decision, but failed to do so. Meanwhile, the court is expected to issue its final ruling as soon as this week.

Though major brokerage firms have taken steps to comply with parts of the fiduciary rule — for instance, they moved away from commission-based compensation and toward asset-based fees — the court injected more uncertainty on the responsibilities advisors and their firms face.

"There is significant confusion on the 5th Circuit decision about whether professionals servicing retirement accounts are fiduciaries and what duties they owe their clients," said Hauptman.

The Labor Department sought to give firms some guidance on their duties, announcing that it would not pursue claims against advisors who make a good faith effort to comply with the "impartial conduct standard," a portion of the fiduciary rule that's currently in effect.

That standard requires advisors to charge no more than reasonable compensation and avoid misleading statements.

The ultimate fate of the regulation is still unclear.

President Donald Trump had ordered the Labor Department to review the rule and prepare an updated economic and legal analysis. Meanwhile, the Securities and Exchange Commission and other regulators continue to hammer away at their own fiduciary regulation.

Still on your own

Amid the confusion of how financial advisors and their firms should respond to the regulation, the fact remains that investors are their own best advocates.

See below for tips on how to vet your financial advisor.

Vetting a financial advisor infographic