The U.S. Department of Labor issued an update to a rule to crack down on financial advisers who put the interests of their broker-dealer ahead of those of their clients.
The new rule requires advisers overseeing retirement accounts to act under a fiduciary standard while also lessening the compliance burden on firms so long as they guarantee the interests of their clients are first above their own.
“At the end of the day, investors have been confused over the difference between an advisor and adviser,” said Chip Hardy, senior Employee Retirement Income Security Act consultant for FinTrust Investment Advisors in Columbia. “The advisor has a fiduciary standard they have to follow, while an adviser does not technically, and that’s where some lines were blurred.”
Hardy authored a white paper called Understanding the DOL Fiduciary Rule which discusses the broad strokes of the rule, which have been known since last April, but only officially released by the Obama administration on April 6, 2016.
In the paper, Hardy said there has been a shift in the population sending the Labor Department into a mode of thinking more about retirement income security. As a result, the new rule is aimed at removing any confusion between advisors and advisers by requiring anyone who gives advice for a fee on any retirement asset do so under a fiduciary standard.
He said the confusion comes when some advisers who are beholden to a broker-dealer may give retirement investment advice based on products offered by the broker-dealer and not what may be best for the client looking to invest.
Chris Beard, vice president of Gateway Wealth Strategies-Raymond James in Greenville, said the new rule is a “non-event” because he and others in his office are already held to a fiduciary standard.
“It’s the right thing to do,” Beard said.
Beard said it was too early to tell if the rule is fair, mainly because the rule was released just recently. He said the financial world has been going through a flattening of fee structures and it was a reasonable belief that consumers would benefit from lesser fees charged for retirement fund management, but “the DOL clearly believes many retirement investors are experiencing monetary harm, so they definitely believe the rule is necessary.”
“Our belief is that consumers must know what they are paying, what value they are receiving in return for costs paid, and that their advisors are clearly putting consumer interests first,” Beard said.
The Labor Department said the new rule will help investors “by reducing losses attributable to conflicts of interest.”
“To the registered reps, or the advisers, it may not seem like it’s a big deal, because they may just have to do more paperwork,” Hardy said. “Advisors, on the other hand, are glad that the broker-dealer world will have to fall in line because we have been doing that all along.”
Frequently Asked Questions
1. What does it mean to be a fiduciary? Why is it important that my adviser be a fiduciary?
Federal pension and tax law protects retirement plans, plan participants and IRA owners by imposing fundamental duties on their investment advisers. Individuals and firms that are held to these standards are called “fiduciaries.” Under the final rule and related exemptions, fiduciaries to plans and plan participants are required to act impartially and provide advice that is in their clients’ best interest.
Having your investment adviser be a fiduciary is important because, under the Labor Department’s regulatory package, it means that they are required to give you advice that is in your best interest, not their own.
2. What does the final rule require of fiduciaries?
At its core, the regulatory package is very simple: It requires more retirement investment advisers to put their clients’ best interest first. It does this by closing existing loopholes and expanding the types of retirement advice subject to fiduciary protections. At the same time, the rule distinguishes activities that are not advice, such as education. The regulatory package also includes broad exemptions that give fiduciary advisers flexibility to continue many common fee and compensation practices so long as protections are in place to ensure that their advice is in their clients’ best interest.
3. How does the rule affect small advisory firms and independent advisers?
This focus on the client’s best interest levels the playing field so independent advisers who put their clients first aren’t squeezed out of the market by the unfair practices of advisers who don’t act in their clients’ best interests.
The Best Interest Contract Exemption is available to advisory firms of all sizes, including independent advisers, providing a way for them to continue to receive many common forms of commission-based compensation while ensuring they act in the best interest of their clients.
SOURCE: U.S. Department of Labor
Reach Matthew Clark at 864-235-5677, ext. 107, or @matthewclark76 on Twitter.