New Fiduciary Rule Proposed by DOL

The Department of Labor has issued a long-awaited redesigned fiduciary rule proposal today attempting to protect investors from biased investment advice. There is a 75-day notice and comment period so expect lots of comments, opinions and in the end maybe a final ruling.

There is quite a bit of money at stake in this matter. An analysis by the White House Council of Economic Advisers estimated that these conflicts of interest result in annual losses of about 1 percentage point for affected investors which equates to approximately $17 billion each year.

This is not the same as the 2010 proposed rule that the DOL dropped during an industry outcry.

retirement

Below are some of the points of the proposed rule:

– Necessitates a “best interest standard” across a large range of retirement advice, essentially expanding the kinds of retirement advice covered by fiduciary protections. This way, any advisor being compensated for providing advice to an individual (which assets to buy or sell, or whether to roll over a 401(k) plan balance into an IRA, for example), would be a fiduciary and be required to prioritize the interest of the client first and foremost.

– Whether the advisor considers themselves a broker, registered investment advisor, or insurance agent the advisor would be required to provide impartial advice in their client’s best interest and could not accept any payments creating conflicts of interest unless they qualify for one of the many, many exemptions.

– Creates a far-reaching new “best interest contract exemption” which still permits commissions and revenue sharing so long as they are disclosed. There is also another newly proposed “principles-based exemption” that would allow advisors to endorse certain fixed-income securities and sell them to the investor straight out of their own inventory. Upcoming comments will likely consider whether or not the consumer will read such disclosures.

– Solicits comments on a new “low-fee exemption” that would allow firms to accept payment that would otherwise be deemed conflicted when recommending the lowest-fee products in a given class of products.

– Differentiates order-taking as a non-fiduciary duty. Basically you can call a broker to execute a trade without triggering fiduciary duties as long as you do not ask for advice.

– Facilitates a carve-out to maintain access to retirement education allowing advisors and employers to continue to provide general education on retirement saving across employer-sponsored retirement plans and IRAs without triggering fiduciary duties.

Once you make it through reading the proposed rule, be sure to pick up the 250-page regulatory impact analysis  published by the DOL , FAQs, and even a fact sheet.