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March 16, 2015 at 12:40 PM
As the Supreme Court gears up to decide a fiduciary responsibility case that could have far-ranging impact on the financial advisor community, all eyes seem to have turned toward the standard for advisors who handle clients’ retirement accounts.
The fiduciary v. suitability debate is not new, but President Obama’s decision to push for the implementation of a fiduciary standard for retirement account advisors at a time when the issue is pending before the Supreme Court has given proponents of the fiduciary standard a potentially game-changing boost. In the coming months, the debate will only heat up as we await both Department of Labor and Supreme Court action—and because widespread press generates client concerns, the time for advisors to familiarize themselves with the arguments is now.
Tibble: The Issue and Facts
The question presented in Tibble v. Edison International is technically a narrow one—how does the six-year statute of limitations imposed by ERISA operate with respect to 401(k) investment advice? The real issue, however, could go to the heart of the professional responsibility of financial advisors who advise as to clients’ retirement account investment choices.
The defendant claims that the six-year standard means that the plaintiffs are only entitled to sue over issues relating to investment choices that were offered in the previous six years. The plaintiffs, on the other hand, claim that the 401(k) advisor has a fiduciary duty with respect to monitoring and altering those investment choices that is ongoing.
Essentially, the plaintiffs argue that the defendants breached a fiduciary duty to act in the best interests of their clients by offering higher cost “retail” investment options, rather than the lower cost “institutional” shares of the same funds. Further, the plaintiffs argue that the plan administrators breached their duty by failing to monitor and update investments on an ongoing basis in order to further the best interests of plan participants.
While the Court could choose to address only the narrow statute of limitations issue, rather than the applicability of a strict fiduciary standard, deciding that an ongoing duty applies to extend the firm six-year period would, by implication, change the role of 401(k) plan advisors.
Repercussions of a Fiduciary Standard
At the most basic level, implementation of a fiduciary standard would mean that advisors have a professional duty to act in the best interests of their clients, despite the fact that the client’s best interests may deviate from those of the advisor (especially with respect to fees or commissions). This differs from the current suitability standard that requires that advisors have a reasonable basis for recommending investments to the client based on an examination of the client’s financial position.
While the suitability standard requires that advisors act fairly in dealing with clients, it is not as demanding as the fiduciary standard, and the potential liability for failing to comply is less clearly defined.
As a result, many critics of the fiduciary standard argue that a broad application of fiduciary duties to retirement account advisors would dramatically increase the costs of compliance. Higher costs are typically passed on to clients, leading many to contend that imposition of a fiduciary standard would make financial advice less affordable—and thereby less accessible—to the middle class.
