With the release of the Department of Labor’s new rule that all advisors of retirement investments must act as legally-binding fiduciaries, a number of questions and criticisms have arisen. To address these, the DOL has worked to clarify the main parts of the new rule that many found confusing or untenable. In the end, the rule may turn out to be more favorable to advisors than initially thought, although questions still remain.
According to Investment News, the DOL has left many of the initial proposals in the rule intact, but did in fact make several concessions on behalf of the financial services industry. Among them is the five-part test for determining whether or not an advisor is a fiduciary. Investment News noted that this standard was unenforceable in its previous form. It also essentially closes a loophole that was present in the initial version of the rule, which only classified fiduciary advice as that which is the primary source of decision-making.
The DOL also extended its compliance deadline from eight months to 12 for the majority of the rule’s requirements. The deadline for the major parts of the Best Interest Contract Exemption have also been extended to 18 months.
Investment News noted that the final ruling, encompassing a whopping 1,023 pages, goes into extreme detail on each part of the rule and the reasoning behind it. In addition to defining exactly what a fiduciary’s role is in the investment process, the ruling also makes clear what a fiduciary is not. Included in this definition is a series of “non-fiduciary communications,” which are limited activities that do not qualify as investment advice that must be beholden to the client’s “best interests.”
Many in the financial services industry were concerned that the new rules would cut out huge swaths of commissions and fees on which advisors depend to make a living. InsuranceNewsNet worked to clarify where issues with compensation may lie, as well as correct some common misconceptions.
According to InsuranceNewsNet, the DOL’s rule does not require that advisors recommend investments with the lowest costs or fees associated. Advisors are allowed to include risk tolerance as a factor when choosing investments – they just need to ensure they provide full disclosure of their reasoning behind choosing a particular strategy. The rule also does not require the elimination of all commissions. In fact, many commissions or fees are still perfectly acceptable, according to InsuranceNewsNet, as long as they are disclosed. In addition, the rule includes a grandfathering clause for existing commission plans. These can remain in place after the April 2017 deadline for compliance.
For advisors and investment firms that rely on commissions, the DOL has said it will allow for accounts to be rolled into new plans that operate with flat fees instead. This may soften the blow from the new ruling and allow advisors to continue making a living. However, as InsuranceNewsNet pointed out, any commissions or fees left over must be “reasonable,” according to the rule. Exactly what qualifies under that somewhat vague standard will likely be decided in upcoming court cases.
While the new DOL rule presents a compliance minefield for advisors, it’s not unreasonable to think that further changes are still on the way. As lawsuits get decided and the industry adapts, it’s likely that the rule will eventually become just another standard to adhere to.