The Department of Labor's (DOL) fiduciary rule, a consumer-protection regulatory mandate, may seem like a recent addition to the financial landscape, but its roots run deep. The seeds of the current rule can be traced as far back as the 1930s, with the formation of the SEC, to the 1960s with the failure of the Studebaker-Packard Corp., which left more than half of its 11,000 workers with little or no retirement benefits.

In this second of a two-part story on the fiduciary rule, we take a look at where the fiduciary rule came from... and where it's headed.

What the Fiduciary Rule Aims to Do

The government has a vested interest in helping make sure people's retirement savings are secure. That's what the Department of Labor had in mind when it developed its current fiduciary standard.

The DOL rule requires anyone who advises people on their retirement accounts to offer clients the best options available for their needs. Previously, brokers and agents were only required to offer "suitable" choices, choices that may cost more or pay the adviser a higher fee or bonus. Such conflicts of interest are estimated to have cost consumers $17 billion per year, before the ruling.

Evolution of Consumer Protections

After months of legal back-and-forth, the rule was implemented on June 9, 2017. But even before this development, history shows that the government has stepped in before to protect people's retirement savings over the years:

• The SEC. Securities and Exchange Commission (SEC) was created in 1932 to regulate the financial services industry, following the stock market crash of 1929 and the darkest days of the Great Depression.
• The Social Security Act. Franklin Roosevelt sought to bolster retirees' safety net with the Social Security Act (1935). Tax changes related to the Social Security Act prompted the creation of private pension plans. In just a few decades, it became increasingly clear how vulnerable individual plan participants were to the health of such plans when the highly publicized failure of the Studebaker-Packard pension plan (1964) and the Teamsters' Union's pension plan came under legal scrutiny in the 1960s when ties to organized crime were revealed.
• The Employee Retirement Income Security Act. From the mid-'60s to the mid-'70s, Congress grappled with how to deal with the increasing problems inherent in managing these funds, vulnerable to misuse and abuse by plan administrators and corporate executives. Finally, the Senate and the House stepped up and passed a bill, which Gerald Ford signed into law on Sept. 2, 1974, called the Employee Retirement Income Security Act (ERISA).
• Pension Protection Act. Originally designed to set the standards and safeguards for private pension plans, ERISA was amended to include additional measures to cover defined contribution plans as well -- such as 401(k)s and 403(b)s -- with the Pension Protection Act of 2006.
• Dodd-Frank Act. Then, with the financial crisis of 2008-09, Congress passed the momentous Dodd-Frank Act on July 21, 2010, which outlined further investor protections and established the formation of a new federal agency to help ensure such changes were carried out and maintained, called the Consumer Financial Protection Bureau (CFPB). Elizabeth Warren, the appointed head of the CFPB, along with many of her colleagues and political allies, became staunch advocates for a new "fiduciary standard" for retirement accounts, and helped pave the way for the DOL's adoption of the new rule.

What's Going on Today

After the inauguration earlier this year, the newly formed administration of President Trump took exception to today's DOL rule and ordered a delay to its implementation to allow time for a thorough review.

Many financial lobbyists have made claims that the rule is unnecessarily onerous and costly, saying that its adoption would unduly impact brokerages and insurance firms, where commission-based products are an essential part of their offerings. With the proliferation of load-waived mutual funds and exchange-traded funds (ETFs) with lower annual expenses, such cries in favor of these fee-structures ring somewhat hollow and appear to be inconsistent with the changing tide of an industry moving toward a fee-for-service model.

Interestingly, many firms had already prepared to adhere to the anticipated new standards before the change was enacted. Investors and clients have come to expect their advisers or agents to take on more of a fiduciary role, as a matter of course, in recent years, and that has been reflected by the fact that more and more firms are began adopting that standard, unprompted by legislative or regulatory mandate.

Investors are Demanding Transparency

The increased recognition in certification, such as the Chartered Financial Analyst (CFA) or Certified Financial Planner (CFP) designations, shows the groundswell in support for a higher ethical standard to go along with commensurately high standards for expertise and competency. Investors have spoken with their wallets in recent years about what they expect from the people managing their money: They value transparency and stewardship as much as the depth and breadth of investment choice.

Firms that acknowledge this shift in attitude and best adapt to this new environment of higher standards of duty to clients will likely stand to benefit most.

The Future of the Financial Industry

In the past, when markets were much less efficient and financial intermediaries provided a real value by creating investment opportunities, sales charges and commissions reflected that value. In the last couple of decades, with the proliferation of index funds and ETFs (two types of funds that seek to passively track and replicate the performance of an index, minus negligible fees) and discount brokerage firms, markets have become more and more efficient, and the old way of selling investment products makes less and less sense.

The battle raging now is not whether the financial services industry will be forced to change how it works, it's over who will drive those changes. Will government enforcement of the DOL's rule end adviser conflicts of interest? Or will consumers be the ones who enforce the changes themselves, by choosing financial advisers who have already pledged to act as fiduciaries, giving objective financial advice?

The old paradigm was much more transaction-oriented, and reflective of a time when investment costs were necessarily higher across the board. With the democratization and increased automation of the industry since the 1990s, the traditional commission-based model has increasingly given way to asset-based wealth management and compensation structures. The old suitability standard, which simply required brokers to "know their customer" and provide a "suitable" solution or product, seemed appropriate when the scope of what most brokerages provided was much more limited and almost purely transactional. Given the expanded roles of most brokers, where advisory solutions are now more important than the products themselves, a higher standard of care to clients is certainly warranted.