There is a huge misconception that the DOL Fiduciary Rule opens the door for clients to sue financial advisors if they lose money on their investments. Legal liability seems to be the key argument of most opponents to the Fiduciary Rule. This is kind of like saying, “When we are no longer allowed to prevent our clients from suing us for malpractice, we believe that a huge number of lawsuits will be filed.” I think we need to take a step back and think about this for a moment, because if this is what the industry is worried about, then how can they say they don’t need a regulatory intervention?
A client won’t have the right to sue their financial advisor just because they lost money, because fiduciaries aren’t responsible for investment gains and losses; however, they are responsible for things like following prudent practices (such as controlling fees and expenses), avoiding self-dealing, following a documented procedure for making investment decisions in the best interest of the client, and actively monitoring and updating the investment management per the needs of each individual client. In the post-DOL Fiduciary Rule world, clients will win lawsuits when advisors fail to follow prudent and regulatory procedures and thereby breach their fiduciary responsibilities.