Due Diligence and the DOL’s DOA Fiduciary Rule

It is official: The US investing world has one less fiduciary standard. Yes, on Thursday, a Texas judge vacated the Labor Department’s 2024 rule applying a fiduciary standard to anyone advising on a retirement account defined under the Employment Retirement Income Security Act —chiefly, 401(k)s and IRAs. The rule had been blocked pending legal challenge since summer 2024, and its demise was a foregone conclusion after the Trump administration declined to continue defending a suit against it. But now it is official. And while the department is purportedly working on a narrower replacement, for now the status quo persists. For investors, this is fine. Rules don’t guarantee good behavior, and thorough due diligence would be necessary with or without this rule.

You see, the Labor Department’s rule wasn’t the only statute requiring certain investment professionals to place client interests ahead of their own, disclose conflicts of interests and take steps to mitigate said conflicts. 1940’s Investment Advisers Act subjects all registered investment advisers to the SEC’s fiduciary standard, retirement account or no. (Disclosure: Fisher Investments is a registered investment adviser subject to this rule.) In 2019, the SEC adopted a rule called Regulation Best Interest (Reg BI) that sought to extend a similar standard to all brokers working with all investment products. And smaller advisers are subject to a patchwork of similar state-level regulations. To us, Labor’s rule always looked like a hat on a hat on a hat, and not necessarily a prettier hat.

Which raises the question of why the department under the current administration, which has a presidential mandate to pursue regulatory flexibility and efficiency, would draft a replacement. To us, it looks like an attempt to head off a popular criticism of the surviving fiduciary rules: that they supposedly leave wiggle room for brokers to give shady advice to folks rolling their 401(k)s into IRAs and aren’t quite tailored to foster full disclosure of certain products’ pros and cons. Industry observers see lingering risk brokers will urge investors into products with high fees and backdoor compensation arrangements. To them, this necessitates a rule that would focus on one-time advice and encompass all products.

We can see the logic. But we also think investors benefit from doing their full due diligence regardless of which standards are in place and which products they apply to. However well-intended and well-crafted a rule is, it doesn’t tell you what an investment professional’s values are and how they work to put investors first. Consider Reg BI. Though well-intended, by blurring the line between investment sales and client service, we think it added complexity. It also didn’t take products we consider suboptimal off the market, as some hoped. Instead, it created paperwork, mandating a mountain of disclosures and formalizing some loopholes. The onus remained on investors to learn what their broker recommended, as well as if it was really right for them.

Beyond that, there is no such thing as a firm that lacks conflicts of interest. It is important to dig into the disclosures, see what those conflicts are, and directly ask how the adviser mitigates them. It is also important to do some independent probing to find out if the adviser or broker has a financial incentive to recommend one product over another. And it is important to make people speak plain English when explaining all these things.

The more complex rules get, the more boxes there are to tick. When anyone is picking a financial professional to work with, we think it is vital to find the people who have a culture of putting investors first—who see it as a core value, not a hassle forced on them by rules and red tape. The companies who do things the right way will happily answer your questions, explaining and re-explaining as needed to simplify the answers. They won’t get defensive or try to silence you with jargon. They will delight in explaining their values and culture.

So don’t worry about being rude or nosy. Arm yourself with a list of questions and treat this like a job interview, because that is what it is! Here are the things we would focus on if we were in the market for some help today:

• What are all the ways you get paid?
• Are there certain products you get paid to recommend? Or paid more to recommend?
• What is your investment philosophy? What core values and principles is it based on?
• Do you separate sales from client service? If so, how? If not, why?
• What processes, tools and programs do you have to educate investors?
• How often will you communicate with me proactively?
• If I want to take a course of action you don’t think it is wise, how will you respond?

The sad truth is that the financial world could have 10,000 fiduciary standards, and it would still be a jungle out there. We wish that weren’t the case, but even very good rules get broken. The bad guys don’t go away. But if you dig in and get all the information you can, it is easier to avoid them.