Understanding the Department of Labor’s Fiduciary Rule

LAST REVIEWED Dec 13 2019 8 MIN READ

By The Human Interest Team

A fiduciary is an individual responsible for managing someone else’s investments. The Department of Labor’s (DOL) fiduciary rule requires financial advisors to work in the best interest of their clients, aiming to protect the ordinary person by regulating what actions fiduciaries can perform. 

Everything You Need to Know About the DOL Fiduciary Rule

The fiduciary rule definition used by the DOL stipulates that retirement advisors must act in their client’s best interest, ultimately putting the client’s interests ahead of their own. It requires all commissions and fees for retirement planning advice, and retirement plans be disclosed clearly in dollar form. It leaves no wiggle room for financial advisors to hide any potential conflict of interest.

Previously, only financial advisors charging fees for services on retirement plans were thought of as fiduciaries, and even then, clients had to ask to be sure. The DOL fiduciary rule expanded the definition to include any professional making a solicitation or recommendation in this area. 

One of the hottest debate topics in finance, many investment firms and brokers did all they could to stop the Fiduciary Ruling from being put in place. While it was originally planned to start being phased in between April 10, 2017, and January 1, 2019, the U.S. Fifth Circuit Court of Appeals officially vacated it on June 21, 2018, and effectively killed it.

However, according to a statement released by Alexander Acosta, the former Department of Labor Secretary in early May 2019, the U.S. Securities and Exchange Commission is working with the DOL to resurrect the rule. 

History of the Fiduciary Rule 

The fiduciary rule looked to expand the Employee Retirement Income Security Act of 1974’s (ERISA) definition of  “investment advice fiduciary.” At 1,023 pages long, it automatically promoted all financial professionals providing retirement planning advice or working with retirement plans to the fiduciary level, ethically and legally bounding them to meet standards associated with that status. 

Before the fiduciary rule being finalized, the Department of Labor held four days of public hearings. During the time the final draft was being created, it was called the fiduciary standard. During Congress’s first session in January 2017, Rep. Joe Wilson (R, South Carolina) introduced a bill delaying the actual start of the fiduciary rule by two years. 

In a late May 2017 Wall Street Journal opinion piece, Alexander Acosta, the newly appointment DOL Secretary confirmed the rule wasn’t going to be postponed beyond June 9 as the DOL continued to seek “additional public input.” The period for public comment regarding the fiduciary rule was officially reopened by the DOL on June 30, 2017, for another 30 days. 

Fiduciary vs. Suitability 

“Suitability” means as long as a recommendation regarding an investment meets the defined objectives and needs of a client, it’s deemed appropriate. 

The label “Fiduciary” comes with an increased level of accountability for financial salespeople, including insurance agents, brokers, and planners working with retirement accounts and plans than previously required from the suitability standard.  

Advisors wishing to continue working on the account are required to provide consumers with Best Interest Contract Exception (BICE) disclosure agreements in circumstances where a potential conflict of interest may exist. This can include advisors receiving a special bonus or higher commission for selling certain products. Any compensation a fiduciary receives is also required to be clearly explained. Both of these measures are meant to guarantee advisors are working unconditionally in their client’s best interests.

Retirement plans covered in the fiduciary rule included: 

Other qualifying retirement plans included, but not limited to include: 

What isn’t covered in the DOL fiduciary rule:

  • When a customer calls a financial professional requesting a specific investment or product. 

  • When a financial professional provides clients with education, including basic investment advice based on a client’s income or age. 

  • Accounts funded with post-tax dollars or taxable transactional accounts not considered retirement accounts, even if the money is personally earmarked as retirement savings.

Who Does the Fiduciary Rule Affect?

Compliance costs are expected to increase with the new DOL fiduciary rules, especially in the broker-dealer industry. Compliance costs for Registered Investment Advisors (RIA) and fee-only advisors are also expected to increase.  

The rule would be especially tough on independent, smaller RIA firms and independent broker-dealers. They may not have the financial means to purchase the compliance expertise and technology needed to meet all the new requirements. While it’s expected that smaller firms might be acquired or disband, they aren’t the only ones that could be affected. Larger firms like American International Group and MetLife Inc. were both already sold off. 

Reaction to the Fiduciary Rule

Supporters of the new rule applauded, saying it would streamline and increase transparency for investors and make conversations easier for professionals thinking about changes. Perhaps most important, it looked to prevent abuses on the part of financial professionals, including investment churning for compensation and excessive commissions. The White House Council of Economic Advisors issued a report in 2015 stating that biased advice funneled $17 billion a year from various retirement accounts. 

However, there are financial professionals staunchly opposing the rule as well. The more stringent fiduciary standards may cost the financial services industry around $2.4 billion each year by removing conflicts of interest such as mutual fund 12b-1 fees paid to advisory and wealth management firms and front-end load commissions. 

Most agree that the 40-year-old ERISA rules are due for a change. Many groups in the financial industry already jumped aboard with the new plan, including the National Association of Personal Financial Advisors (NAPFA), the Financial Planning Association (FPA), and the CFP Board.

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