How Do DOL Rules Protect Investor Interests in Cases of Conflicted Investment Advice?

  How Do DOL Rules Protect Investor Interests in Cases of Conflicted Investment Advice?   Recent trends in securities law have resulted in the establishment of rules by …


How Do DOL Rules Protect Investor Interests in Cases of Conflicted Investment Advice?


Recent trends in securities law have resulted in the establishment of rules by the Department of Labor (DOL) that are designed to protect the interests of investors in cases of conflicted investment advice.  These rules are the product of high-level debates and criticisms surrounding the substantial annual losses suffered by investors unable to collect payouts in cases of conflicted investment advice.


A federal government task force has given recommendations to alter the status-quo by introducing new rulings preventing investment advisors from giving advice which might cause losses for clients.  Before the promulgation of the DOL rule, advisors were less restricted when giving conflicted investment advice which could result in massive losses in retirement savings or other investments by pensioners.  This is because investment advisors were not appropriately obligated to give advice which would result in the best possible returns for clients.


Changes with the DOL rule


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DOL policies are in accordance with the US securities and investment law because this law is aimed to protect the interests of Americans in cases of conflicted investment advice. The DOL rule requires that all sums made payable to advisers must comply with terms and conditions that benefit and favor investors. The DOL rule also assigns “fiduciary” status to investment advisors and agents to ensure that all advisement activity will be directed toward the best interests of clients.  


The rule is broadly designed to create a higher level of protection for investors and to reduce the $17 billion in losses that are generated each year as a result of conflicted investment advice from investment agents and advisors. The DOL rule is largely effective because it compels all investment agents to refrain from granting advice meant to pad commissions without working in the best interests of investors to generate stable returns.


Efforts to block the rule


Recent efforts to block the rule are being challenged by the Public Investors Arbitration Bar Association (PIABA), which has filed an amicus brief with the US District Court for the District of Columbia.  The PIABA brief comes in opposition with a preliminary injunction that was made by the National Association for Fixed Annuities (NAFA).  


Experts have argued that annuities have become particularly problematic in the prevalence of conflicted advice, as brokers brokers are almost constantly looking to increase front-end commissions at the expense of client investors.  PIABA President Hugh Berkson has said that the amicus brief "explains how investors are harmed by conflicted advice under the current standards governing investment professionals, and will continue to be harmed if the DOL’s Conflict of Interest Rule is not permitted to be fully enacted.”


Berkson went on to say that the “DOL rule forces anyone who gives advice to retirement investors to act in the investors’ best interest. As it stands, without this rule, many advisors do not have to give advice that is in the clients’ best interest. This costs investors billions of dollars every year."


Looking ahead


So while is is true that there are many investment agents that are able to provide favorable and sincere advice to clients, it is becoming clear that this is simply the exception that is proving a troublesome trend.  The “fiduciary” status of all agents and advisors will impart drastic and macro-level changes in the investment industry because the pensions and savings of many investors will be protected by the DOL ruling rather than seeing them fall victim to conflicted investment advice. The financial markets will be watching closely to see how the court responds to the PIABA amicus brief, as this is likely to be a key indicator of the broader trends we will see in coming years.



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