On April 6, 2016, the Department of Labor introduced a new rule extending and strengthening its existing definition of a fiduciary. Previously, while many financial advisors such as Certified Financial Planners and Registered Investment Advisors were subject to these fiduciary standards, brokers and insurance agents were exempt. Rather, they abided by the “suitability standard,” which allowed firms to make investment recommendations that were suitable for their clients, but not necessarily the best investment option based on the clients’ unique needs and goals. This updated “fiduciary rule” requires financial advisors to act solely in the interest of their clients by putting their clients’ best interest ahead of the advisors’ profits. Under the DOL’s revised ruling, all financial professionals offering investment advice for retirement accounts will need to meet this fiduciary standard.
The ruling now prohibits financial advisors and institutions from receiving commission-based compensation, unless the advisor or institution adheres to the “Best Interest Contract Exemption.” In order to meet this exemption, the financial professional or institution must now acknowledge its fiduciary status for itself and its advisors and must make prudent investment advice for the client by avoiding misleading statements and receiving no more than reasonable compensation. Furthermore, policies and procedures must be in place at the institution to mitigate the impact of conflicts of interest and extensive disclosures must be made concerning conflicts of interest and the cost of the institution’s advice.
Many in the financial industry argue that the compliance costs and legal paperwork associated with this new rule will make financial advice more expensive. These arguments have manifested in several noticeable ways. First, American International Group and MetLife sold their brokerage business amid concerns of increasing compliance and liability costs. Second, in late April, the U.S. House of Representatives passed legislation to block the new rule. Most recently, on June 1st, constituents within the financial services industry, including the U.S. Chamber of Commerce and Financial Services Institute, filed a lawsuit against Thomas Perez (Secretary of Labor) and the United States Department of Labor. In the complaint filed, the plaintiffs allege, amongst other things, that the Department of Labor “disregarded the regulatory framework established by Congress, exceed its authority, and assumed for itself regulatory power that is vested in the Securities and Exchange Commission in ways that will harm retirement savers”. In a statement issued by the plaintiffs’ Chief Executive Officers, the group argues that the new regulations “will make saving for retirement more difficult”, “will unfortunately restrict their (savers) access to affordable retirement advice and limit their options for savings” and “will shackle Main Street financial advisors with extensive new requirements and constant liability, forcing them to limit the options and guidance they provide to retirement savers.”
The final resolution to these challenges remains to be seen; however, pending some successful outcome, sweeping change to the regulatory landscape of retirement accounts will arrive in April 2017.
For additional information about this DOL rule, and for further ideas on how to stay compliant while furthering your business goals, click here to contact us, or give us a call at (513) 241-8313.