With the Labor Department's fiduciary rule finalized, are some advisors now a target for lawsuits?
Experts suggest that the threat of litigation – which exists because the rule provides clients with the right to legal action – could push some firms to change business models and spur some advisors to exit the business.
"Litigation is one area where firms are particularly concerned," says Chris Joline, partner PricewaterhouseCoopers, financial services compliance and regulatory.
Joline, speaking during a Financial Planning webinar on the fiduciary rule's impact, says he thinks some firms may move more assets into a fee-based platform. And, in addition to litigation concerns, he also notes that there are stiff disclosure requirements in the rule regarding fees.
"When people really start to look at the rule, more and more firms will conclude that they do not want to comply with all of this because it's a minefield of trouble," he says.
While the Obama administration backed the Labor Department's efforts to craft a new fiduciary rule, the department did not get a boost in resources to police the rule. However, the rule does allow clients to sue firms for breach of fiduciary duty and also to launch class action lawsuits.
"I think that, knowing that there was a limit to their ability to enforce, that there would be a private right to action," says Dan Bernstein, a principal at Hamburger Law Firm.
A version of the fiduciary rule was first proposed in 2010, but only finalized earlier this month. Lawyers, chief executives and compliance officers have been pouring over the rule's more than 1,000 pages. Ron Rhoades, professor and director of the Financial Planning Program at the Gordon Ford School of Business at Western Kentucky University, says he spent more than 40 hours reading it over the course of a weekend.
REPUTATIONS AT RISK
Some firms may view the threat of litigation as a cost of doing business, Rhoades, a past NAPFA national board member, says. "But as an advisor, your situation is completely different."
The reputational risk could be deadly for an advisor, Rhoades says. "You don't want to view it, from the point of view of your practice, as a cost of doing business. You want to run a clean practice."
Rhoades says he thinks that the rule will encourage more firms to move clients onto fee-based platforms – a direction that the industry has been moving towards for some time. However, he rejects suggestions made by others that pressures created by the rule could force advisors out of the business.
"I think most advisors die at their desks… For a small subset, this will probably change their mind about retirement. But for most, I think they will say, 'I still love this business and I still want to be giving advice when I'm 80,'" Rhoades says.
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