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What Advisors Need To Know about the DOL Fiduciary Rule

On April 6, the Department of Labor (DOL) published the final version of the conflict of interest rule it proposed in April 2015. The new regulation significantly broadens the definition of “fiduciary investment advice” and affects the delivery of investment information to qualified retirement plans, plan fiduciaries and individuals saving for retirement through their employer sponsored retirement plans or through Individual Retirement Accounts (IRAs). We are carefully reviewing the regulation to better understand its final effect on clients and financial advisors, and will provide additional details as we develop a full understanding of its content. In the meantime, BAM Retirement Solutions Manager and Advisor Kristen Donovan, QKA™, and Retirement Advisor David Shipp, QPA, QKA™, ChFC, share their topline analysis of the changes:

Why was this regulation proposed? The DOL fiduciary rule was proposed to better protect people who are saving for retirement as a result of changes in the investment environment. Over the last 40 years, the availability and importance of self-managed investments, such as IRAs and participant-directed retirement plans, has increased. At the same time, the number and complexity of investment products in the marketplace has grown, as well as the creative and sometimes questionable way they are packaged and sold. Due to this changing landscape, the DOL has issued new fiduciary/conflict of interest rules that apply to ERISA retirement plan advisors and IRAs. The DOL believes that requiring all advisors who work with retirement plans to operate under a fiduciary standard will prevent advisor conflicts of interest estimated to lower participants’ returns by 1 percent a year and result in approximately $17 billion lost annually.

What’s changed? What’s different from before? The rule redefines the meaning of “fiduciary investment advice” for ERISA plans and IRAs, expanding the types of advice it covers and thus bringing more advisors under the fiduciary umbrella. Recommendations that previously would not have resulted in a prohibited transaction may now run afoul of the rules that bar financial conflicts of interest. In its final form, the rule defines who is considered a fiduciary investment advisor. Accompanying prohibited transaction class exemptions allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation as long as they are willing to adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their clients.

Who will this rule affect? How? On the client/plan participant side, the new regulation should provide extra transparency and peace of mind in a relationship retirement savers usually don’t have control over (who their employer chooses to manage their retirement plan). We hope to see the rule result in better investments offered (and better advice given) to retirement plan participants.

On the advisor side, the main impact falls on broker-dealers. Broker-dealers frequently receive compensation that varies based on the investment options they recommend, and they will now have to comply with prohibited transaction rules designed around a best-interest standard. The main avenue of relief from these prohibited transaction rules remains the best interest contract (BIC) exception. In the final rule, the scope of this exemption has been expanded and certain compliance requirements have been simplified.

Registered Investment Advisors (RIAs), who already are considered retirement plan fiduciaries, do not receive compensation that varies by investment, so the impact will be minimal with one exception. The new rules take the position that 1) a recommendation to take distributions from a plan or IRA and 2) a recommendation about how to invest such distributions will constitute fiduciary advice. How this will play out for RIAs is a key question we will examine further.

When will the new regulation take effect? Compliance with the rule will be required beginning in April 2017 (one year after the final rule is published in the Federal Register). Exemptions will be available at that time with a “phased” implementation approach designed to give financial institutions and advisors time to prepare.

What about advisors who don’t oversee retirement plans? Does the rule matter to them? You may not work directly with a retirement plan, but you may deal with questions regarding client IRAs and IRA rollovers. The new rule’s expanded definition of “investment advice” has language to include recommendations about IRA rollovers as fiduciary in nature. We will determine how this regulation influences recommendations concerning IRAs and IRA rollovers as we unpack the rule’s various elements.

Why was there so much opposition to this regulation? Broker-dealers are generally only required to meet the suitability standard in making investment recommendations rather than operating under the fiduciary standard. The suitability standard required broker-dealers only to recommend a product “suitable” to meet clients’ goals; the fiduciary standard requires an advisor to act in a client’s best interest. The DOL rule changes will require broker-dealers to act as fiduciaries for retirement plan and IRA purposes, affecting the compensation arrangements available to them.

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2016, The BAM ALLIANCE

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