A clear path ahead for the DOL fiduciary rule

May 23, 2017 by Sean Marus

A financial advisor discuses fee structures with his clients.

about the author:

Sean Marus

Product marketing specialist

With years of experience in product marketing and content generation in the financial services industry, Sean is committed to providing informative and impactful content to financial professionals and the clients they serve.

Alexander Acosta, the new Secretary of Labor, confirmed on May 22 that the Department of Labor (DOL) Conflict of Interest Rule – Retirement Advice will go into effect as planned on June 9 after months of uncertainty regarding implementation of the rule.

In an op-ed posted in the Wall Street Journal, Acosta stated that, though the DOL will continue to seek public input on the fiduciary rule, they “have found no principled legal basis to change the June 9 date while we seek public input.”

Now that the rule will be fully enforced by the start of 2018, it is more important than ever to ensure that your firm is compliant within the confines of the fiduciary rule.

A brief history of the rule

The DOL rule was proposed in reaction to loopholes within the Employee Retirement Income Security Act of 1974 (ERISA). ERISA was initially outlined to ensure that pension managers were working in the best interest of pensioned employees. However, now that pensions are trending toward obsolescence and self-directed retirement accounts like 401(k)s and IRAs are becoming more commonplace, the DOL sought to expand fiduciary protection to these accounts.

The objective of redefining who was categorized as a “fiduciary” was clear: any individual giving financial advice must prove that they are acting in their clients’ best interests. The rule was first announced in April 2016 with aspects slated to be enforced in April 2017, and full enforcement scheduled for January 1, 2018. The rule was postponed by 60 days so that personnel related to the then-new Trump administration could assess the effects of enforcing a fiduciary standard.

In the wake of a memo alerting of the delay for the new personnel within the DOL to assess the rule, there were approximately 193,000 comments from the public regarding the delay. Of this, more than 92 percent opposed the delay. When the delay ends on June 9, two provisions will take effect: expanding who is defined as a “fiduciary” and implementing standards of impartial conduct. Other than these two provisions, the DOL will continue to review and assess the rule until the final implementation date for the rule: January 1, 2018.

The new definition of "fiduciary"

The new fiduciary standard will apply to any individual who receives compensation for providing advice on acquiring, holding, disposing of, or exchanging securities on a client’s IRA or 401(k), as well as other tax-deferred accounts. This also extends to any individual who maintains management over an account such as investment strategies, portfolio composition, advice on which types of accounts to use, as well as investment advice.

For advisors that earn commission for recommendations (i.e. not paid directly by clients), the clients must sign a Best Interest Contract Exemption (BICE). This exemption guarantees that an advisor will work toward the client’s best interest, disclose conflicts of interest, and provide information on their compensation structure for their recommendations.

The importance of compliance

Now that full enforcement of the rule beginning on January 1, 2018 seems inevitable, the need for advisors emphasize strong compliance standards is of the utmost importance. If an individual who offers financial advice does not provide documented evidence for recommendations being made in a client’s best interest, there can be legal action taken against him or her.

To be compliant, an individual must maintain certain responsibilities, which include:

  • Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments; and
  • Charging only reasonable plan expenses.

When making a commission-based sale or recommendation, a financial professional must have the BICE signed before the first transaction takes place. The BICE must be signed by all plan participants and IRA holders that are involved in the transaction.

Looking ahead

Though the encouragement of public input regarding the rule could still result in additional changes, the main facets of the fiduciary rule are still set to be implemented. The definition of individuals who are considered to be a “fiduciary” has been expanded and the need to be transparent regarding commissions and fee structures will be heavily emphasized moving forward.

Click here to learn how the Compliance Blueprint from Advicent can empower your firm to increase transparency with clients and streamline the compliance workflow, all while keeping financial planning at the core.