A new Department of Labor (DOL) rule requires financial professionals advising retirement savers to advance their clients’ best interests above their own profits. Known as the Fiduciary Rule, the White House Council of Economic Advisors estimates that it will save retirement savers $17 billion annually.
What is a conflict of interest?
A conflict of interest arises when financial professionals recommend investments that benefit themselves financially (e.g., high commissions) but are not necessarily in their clients’ best interests.
How will the new rule affect me?
Financial professionals who offer advice regarding your retirement accounts must recommend investments that are in your best interests. In other words, financial professionals must act as a fiduciary in regard to your retirement accounts. There is a caveat, however. Advisors can continue receiving commissions if they sign a contract promising to charge “reasonable” fees and disclose conflicts of interest, among other things (see “Will I see new documentation?” on page 4).
What is a fiduciary? Why is important that my financial advisor is a fiduciary?
A fiduciary is required to put his client’s interests first and to eliminate or at least disclose conflicts of interest. In contrast, financial advisors who recommend investments based on “suitability” must have a “reasonable basis to believe” an investment is suitable for an investor based on various factors (e.g., age, tax status, investment objectives, liquidity needs, and risk tolerance). Here’s a common example: Mutual fund A pays a higher commission to the broker and is more expensive for the client to purchase and own. The broker can still recommend it as long as it’s suitable—even if mutual fund B is much cheaper for the client.
Who must follow the new rule?
Financial professionals—including brokers, insurance agents, and investment advisors—who provide retirement investment advice in exchange for a fee must act in the clients’ best interests (i.e., as a fiduciary).
Will I see new paperwork?
Yes, probably. Firms who will elect to continue to receive fees, including commissions, that may conflict with investors’ interests need to provide investors with a contract (the Best Interest Contract or BIC/BICE) promising the firm will: (1) act in the investors’ best interests; (2) charge “reasonable compensation”; (3) disclose how they are paid (including on the firm’s website); and (4) adopt policies and procedures to ensure compliance with the new rules. New customers will sign the contract when completing paperwork to open an account. Existing customers may receive a notice (by mail or email) disclosing the investors’ new rights. Investors are not required to take action, unless they wish to object to the terms outlined. The Best Interest Contract is not required until January 1, 2018.
Do investors have any recourse if an advisor fails to act in their best interests?
Investors have the right to pursue legal action if financial professionals do not comply with the new standards. Most disputes must still be resolved through arbitration (not in court), with a new and notable exception—investors may bring class action lawsuits.
When does the new rule take effect?
The rule takes effect on April 1, 2017 but some requirements (e.g., the Best Interest Contract Exemption) allow phased implementation with full compliance required by January 1, 2018.
What’s not covered?
Educational materials—if no specific investments are recommended
Advice provided before April 10, 2017
“Hire me” recommendations—financial advisors can urge you to hire them or their firms even if doing so is not really in your best interest.
Could the new administration block the rule?
Maybe, but not easily. The Fiduciary Rule is final and effective beginning on April 1, 2017. As a result, the new Secretary of Labor cannot repeal the Fiduciary Rule; although, he could delay implementation. The DOL could replace it, but the process—new regulations, public comment, modifications, and Office of Management and Budget’s analysis—is slow. Congress could pass legislation that would overturn or amend the rule but that, too, would be difficult, considering the makeup of the Senate and time-consuming process involved. The new administration could also choose not to enforce the Fiduciary Rule or decline to defend it in pending litigation. Notwithstanding the new administration’s opinion concerning the Fiduciary Rule, large wealth management firms have expended time and money preparing to comply, including using the new fiduciary standard as a marketing opportunity. And, buzz surrounding the Fiduciary Rule has awakened investors to the importance of hiring a fiduciary. As a result, political will to stop or delay the Fiduciary Rule may not be enough to motivate the new administration or Congress to take on the intricate and time-consuming task.
Where can I read more about the Fiduciary Rule?
For a thorough explanation of the background and applicability of the rule, read: “Consumer Protections for Retirement Investors – FAQs on Your Rights and Financial Advisers” prepared by the DOL in January 2017. To watch the DOL announce the rule, including speeches by U.S. Secretary of Labor Thomas E. Perez and Senator Elizabeth Warren, visit: https://youtu.be/uDe_T9IrAjU and https://youtu.be/jkpbLet9T8U.
What’s the status of the Fiduciary Rule as of August 2017?
In August 2017, the Wall Street Journal reported that the DOL proposed to delay the Fiduciary Rule’s compliance deadline by eighteen months-to July 1, 2019.. According to the Wall Street Journal, the DOL included the proposal in court documents “as part of a lawsuit in the U.S. District Court for the District of Minnesota.”