Vanguard: Why Proposed Fiduciary Rule Is Unfit

Vanguard joined the battle for a clearer—and fairer—fiduciary status requirement.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

The Department of Labor is pushing for a new fiduciary rule for retirement investment advice that would require financial advisors to operate with their clients’ best interests at heart, and avoid conflicts of interest.

On the surface, who could possibly oppose this type of regulation and expect to survive in a highly competitive advisory industry that’s constantly vying for new investor dollars?

But more and more groups and companies are voicing their concerns that the new proposed rule, in its vast complexity, would do more harm than good for retirement investors. At the core of the problem is the very definition of fiduciary status.

Pages And Pages Of Complexity

As Juli McNeely, president of the National Association of Insurance and Financial Advisors, recently pointed out, consider that the idea might seem simple enough—serve your clients well—but the actual proposed rule “fills 115 pages in the Federal Register. Its regulatory impact analysis is 250 pages long. Supporting documents add hundreds of additional pages to the tally.”

“Obviously, there is much more to the proposal than simply stating that advisors need to work in their clients’ best interests,” she said, adding that in its current form, the rule for retirement investment advice is “unworkable.”

“The proposal would confuse investors, increase costs, harm advisor-client relationships and interfere with the ability of advisors to serve retirement investors,” she said in her most recent blog.

Vanguard Calls For Rule Change

This week, Vanguard joined in the fight, submitting two letters to regulators raising its concerns with the proposed rule.

To them—a firm that manages some $3 trillion of assets for institutional and retail investors—acting in clients’ best interests is a must, if not a given, but what constitutes that fiduciary status is what’s an issue with this rule.

As they see it, the proposed regulation in its current form would limit retirement investors’ access to education and advisory services.

“The Department’s current proposal would require considerable modifications to reflect investor expectations and to preserve investors’ access to important investment information and educational services,” Vanguard’s Martha King, managing director of institutional investment group, said in a statement. “Without these modifications, the Department’s proposal will likely increase the cost of investment services for many, and completely eliminate these services for others.”

Here are 3 key issues, of many, Vanguard has with the proposed rule, as stated in Vanguard’s letter to the DOL:

1. The proposed definition of fiduciary investment advice is “overly broad, and encompasses sales and factual information that’s not fiduciary in nature.”

In other words, there are various communications, such as educational and marketing materials, that should not be considered fiduciary investment advice, as the DOL proposes.

“We agree that the Department should update the definition of an investment advice fiduciary to reflect the current retirement plan and IRA marketplace,” Vanguard said. “The proposal, however, would define investment advice too broadly. An overly broad definition may reduce retirement investors’ access to beneficial services or make those services available only at much higher cost.”

2. A retirement investor’s expectations should play a part in determining whether there’s a fiduciary status. Advice should only be deemed advice if it’s individualized.

This comes down to whether an investor perceives the communication being delivered by an advisor as investment advice. Apparently, the DOL is concerned that some who call themselves “advisors” don’t abide by fiduciary status in account agreements. The advisor title is merely a way of gaining trust, and as such, the DOL wants to change its current definition.

But a more clearly-focused definition is what’s needed, and one that takes into account what the investor’s expectation is out of the interaction with the advisor, Vanguard argues. Is it being perceived as a source of reliable investment advice? Is the advice tailored to an individual investor?

Vanguard further argues that only advice that’s individualized to a specific client should be considered fiduciary. If it’s not individualized, investors should not perceive it as investment advice. But the broad proposed definition would prevent advisors from distributing educational materials that might be beneficial to the investor.

A clearer definition that takes into account factors such as investor expectations would allow for other “marketing practices to continue.”

3. There should be exceptions to what falls under the fiduciary umbrella, such as marketing materials, and investment education.

In essence, not every communication an investor receives from an advisor should be deemed investment advice.

“Vanguard appreciates that the Department is concerned about participants, IRA investors and smaller plans possibly being unable to distinguish between education and investment advice,” the letter said. “An outright prohibition on discussion of specific investment alternatives, however, would be harmful to all retirement investors.”

“If faced with assuming fiduciary status for mentioning specific investment alternatives, financial institutions are likely to either cut back the level of education that they offer to retirement investors, or offer only a fee-based advice service.”

Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.