5th Circuit Agrees: Stock Brokers & Insurance Agents Just Salespeople

DOL Fiduciary Rule One Step Closer to the Supreme Court

The Department of Labor's controversial "Fiduciary Rule" seems destined for the Supreme Court, even after a series of judicial victories supporting the rule. On March 15th, the 5th Circuit Court of Appeals in Texas ruled against the Department of Labor's new Fiduciary Rule.

This new ruling is at odds with a 10th Circuit ruling in support of the Fiduciary Rule. A split between the Circuit Courts of Appeal is a key step to getting a case heard by the Supreme Court Of The United States.

Stockbrokers and insurance agents are compensated only for completed sales, not on the basis of their pitch to the client.
— 5th Circuit Court of Appeals Opinion

Insurance and Brokerage Companies Argue Their "Advisers" Are Just Salespeople

In their written opinion, the 5th Circuit cites the insurance and brokerage industries' arguments that stock brokers and insurance agents are just salespeople. That their 'advisers' don't actually give their client advice. Instead, they just offer their clients a sales pitch. "Stockbrokers and insurance agents are compensated only for completed sales ('directly or indirectly'), not on the basis of their pitch to the client. Investment advisers, on the other hand, are paid fees because they 'render advice.'"

Effectively, while Registered Investment Advisers offer advice to clients, the courts agreed that insurance agents and stock brokers just pitch products. In fact, the 5th Circuit called recommendations made by stock brokers and insurance agents "sales pitches" seven times in their opinion. And this is the court which has agreed with the brokerage and insurance companies.

What's So Controversial About the Fiduciary Rule?

The Fiduciary Rule controversy revolves around a difference of opinion about the relationship between a "financial adviser" and a client. On one side are people (like myself) who believe a financial advisor should have a legal obligation to serve the best interests of the clients. And on the other side are those who think they shouldn't

Financial Adviser as Adviser

The typical investor would think if they are getting advice from a professional adviser, the advice would be in the best interest of the client. Those in favor of the Fiduciary Rule agree, saying a financial adviser should have a legal fiduciary duty to serve the best interests of the client.

Sadly, only Registered Investment Advisers (RIA) and their employees are currently held to the Fiduciary Standard by law. The DOL Fiduciary Rule would make all financial advisors held to this standard if they are giving advice related to retirement accounts.

If you want to know if an adviser is a fiduciary, ask them for their Form ADV (like this one), which is the SEC disclosure fiduciary advisers must provide. If they don't have a Form ADV, they are not a fiduciary.

Financial Adviser as Car Salesman/Saleswoman

The stock brokerage and insurance industries are fighting hard against the Fiduciary Rule, because they like the status quo. Under the current model, a financial adviser who is a stock broker or insurance agent can recommend an investment plan which makes the most money for the adviser and the company they work for, even if it costs the client more.

While this is good for the adviser and company, most investors wouldn't be happy with it--if they knew. And sadly, one of the things the brokerage and insurance companies are fighting against is having a legal obligation to tell clients about these conflicts of interest.

For financial advisers who are stock brokers or insurance agents, their legal obligation is to their employers, not their clients. Each is a representative of the company they work for, not a fiduciary for their client. This is not to say they are bad people, but it is important to remember their loyalty, by law, must be to the brokerage or insurance company.

Which Type of Adviser Do You Have

There are two easy ways to check if your adviser is a fiduciary or not. The first is to look at how an adviser is licensed by checking their disclosures with FINRA and the SEC. You can learn what each financial adviser license means through our website or other resources. 

The other method is to ask the adviser what type of company they work for. If you want an adviser who is legally held to the fiduciary standard with all of their investment advice, ask them for their Form ADV. If they don't have one, they currently aren't a fiduciary.


Joshua Escalante Troesh is a tenured professor of Business at El Camino College and the founder of Purposeful Finance, a financial literacy organization. He is also the owner of a fiduciary financial planning firm.  He can be reached for comment at info@purposefulfinance.org