By Dan Viola, partner, Sadis & Goldberg – Status of the new DOL fiduciary rule. The Department of Labor’s (the DOL) new fiduciary ruling (the Rule) has created strife in the securities industry and has the potential to significantly impact how financial advisers and brokers will manage retirement accounts in the future.
Currently, brokers, financial advisers, and other finance professionals don't legally have to act in a client's best interest, with few exceptions, such as those who are registered as investment advisers with the US Securities and Exchange Commission or in individual states. Those who aren’t registered, like brokers, just have to prove that the investment is suitable, not necessarily the best option, for their client – no matter that that fund might be more expensive and provide a better commission for the adviser.
The Obama administration found that conflicted advice cost savers about USD17 billion a year based on a 2015 report.
To be clear, the Rule applies only to retirement accounts like 401(k)s and individual retirement accounts, not to regular taxable accounts. According to the Investment Company Institute, Americans invest USD7.8 trillion in IRAs and USD7 trillion in 401(k)s. While there is no delay currently imposed on the implementation of the Fiduciary Rule, the DOL will likely postpone the scheduled April 10, 2017 effective date to conduct a review process.
On 20 January, 2017, the DOL issued two new sets of Frequently Asked Questions (FAQs) on the Rule. One of the sets of FAQs focuses on the new definition of fiduciary investment advice and the other set is geared to retirement investors and consumers, covering consumer protection features of the new Rule. This is the second of three rounds of guidance to be published by the DOL prior to the effective dates of the new Rule.
The Executive Branch also issued responses to the Rule on 20 January, 2017. The White House issued a Memorandum from Reince Priebus to the heads of the executive departments and agencies requesting a sixty (60) day delay as the effective date of regulations published in the Office of the Federal Register have not taken effect as of yet.
On 3 February, 2017, President Trump signed a presidential memorandum to delay the Rule by six (6) months casting doubt on its viability. The memorandum instructs the DOL to conduct a new “economic and legal analysis” to determine whether the Rule is likely to harm investors, disrupt the industry or cause an increase in litigation and the price of advice. If the DOL concludes that the regulation does hurt investors or firms, it can propose a rule “rescinding or revising” the regulation.
Some are saying the Rule would hurt investors because it would supposedly make it harder for people to get retirement advice.
For example, advisers wouldn’t be able to afford to service low-balance retirement accounts. On the other hand, consumer, labor and civil rights groups have pushed for the Rule saying that the current system provides a loophole that lets brokers drain money from retirement accounts in fees they receive that can sway the investment advice they give their retirement accounts.
We see that many retirement advisers already have chosen to act in their clients’ best interests, opting to work under the fiduciary standard – it is ultimately a business advantage.
The FAQs are available on the DOL's website and the Memorandum’s are available on the White House Press Office website.
January 20, 2017 – Regulatory Freeze Pending Review
February 3, 2017 – Fiduciary Duty Rule