It’s election night here in the UK. Strap yourselves in, because its going to be a tight one.
More than 100 million people have already voted to decide on the 46th president of the United States. That’s the highest turnout in a century.
For financial planners stateside, one of the most important results of a Biden win could be a return to tighter regulation; specifically the introduction of a fiduciary standard for the profession.
Trump famously killed off the introduction of a fiduciary rule for American financial advisers in 2018. The president claimed he wanted savers to “make their own financial decisions,” as his administration ditched rules that would have formalised the requirement for brokers and insurance agents to act in the best interest of clients.
Commissions would have to have been disclosed more clearly, conflicts managed where possible, and sales would have been banned entirely where they couldn’t be shown to be the right kind of product for the saver in question.
The rule was drawn up under the Obama administration, and a final version of the plan was finalised by the Labor Department in 2016. It ended up being replaced in 2019 with Securities and Exchange Commission rules on “regulatory best interest” for broker dealers.
While those rules may be an improvement from the earlier suitability standard, which did not enforce doing the best for the client, just recommending what was suitable, they still rely much more on proactive disclosure from advisers, and do not ban some of the payments that would have been prohibited under the Labor Department’s rules.
While some advisers choose to act as fiduciaries anyway, and areas such as New York State have adopted certain elements of the plans off their own backs, the Trump executive order to quash the rules bowed to elements of the financial services sector that feared additional red tape would impact upon access to advice for lower value consumers.
Adviser trade body the Financial Services Institute took a key role in making sure Obama’s rule ended up in the courts. An early legal defeat led the Labor Department into its backtrack, losing the appetite for a protracted fight to force through its plans.
Killing off plans for a fiduciary rule took the USA away from the example of Australia when it comes to setting a standard.
The Australian Securities and Investments Commission’s legally-binding Best Interests Duty fiduciary rule has been in place since 2013, after being introduced under Australia’s equivalent to RDR – the Future of Financial Advice Reforms.
Should UK advisers have a fiduciary duty to clients?
The US is now more in line with the UK’s regulations. Having mooted plans to define fiduciary duties for all investment intermediaries by ordering reviews from the Law Commission and FCA, nothing came of UK government discussions back in 2012.
A Biden win could well see a move back towards a fiduciary standard, however. The Department of Labor significantly weakened its rule in order to try and get it passed through the courts. Vice presidential pick Kamala Harris was among 29 Democratic congresspeople who wrote a letter to the department in opposition to the changes.
“Many advisers do right by their retirement clients, but some do not,” they wrote in the letter. “An unscrupulous adviser can steer a retirement client towards an investment that provides a larger incentive for the adviser even if it is not the best choice for the client.
“A fiduciary standard ensures that advisers have to put their retirement clients’ interests first.”
The congresspeople noted that the only current test in regulation dates back to 1975, under which an adviser has to meet five separate criteria in order to be held responsible as a fiduciary.
Bernie Sanders and Elizabeth Warren – two other prominent senators during the presidential campaign, having run for the ticket themselves – are also signatories to the letter, suggesting a solid level of support at the top of the party.
The Democrats did not namecheck any particular adviser legislation in their policy promises. However, drafts of the aspirational “party platform” which circulated earlier this year touted “immediate action to reverse the Trump administration’s regulations allowing financial advisors to prioritize their self-interest over their clients’ financial wellbeing.”
Advisers should be “legally obligated to put their client’s best interests first”, the document states – hailing back to fiduciary levels of care as opposed to the later best interest rules.
With so much else on the domestic and international agenda, financial advisers may well slip through the net. But make no mistake, a Biden win has real potential to change the landscape for them.
