If you follow financial news, chances are you’ve been seeing a lot of stories about the U.S. Department of Labor’s (DOL) new Fiduciary Rule and what it means to both advisers and consumers. I first wrote about the Fiduciary Rule in February, and have been watching developments unfold along with more than 300,000 advisers practicing in wirehouse, broker-dealer and Registered Investment Adviser (RIA) channels throughout the country.
Today, the (DOL) released its final rule, which is expected to go into effect by early next year. Here’s a great report that explains the implications of the Fiduciary Rule for investors, and in today’s post, I thought I’d answer some different questions based on other articles I’ve been seeing in the news.
Other advisers have compared the impact of the DOL’s fiduciary rule to the Affordable Care Act. Is it as big? Why or why not?
In my opinion, this is a ridiculous comparison by those who would try to taint this rule in the same political way they tried to taint the Affordable Care Act. This DOL rule is an attempt to clarify what I believe is already in the law. If someone provides financial advice (which includes whether or not to make a rollover from a participant’s 401k plan), that individual is required to do so on a fiduciary basis. The problem is that most firms (and their advisers) don’t adhere to this higher standard, and further, they don’t want to! They don’t really provide what might legally be called “advice” during the rollover process. Instead, they convince clients to roll out to individual IRAs and then sell the clients products that are not in their best interests. Unfortunately, most times, the clients don’t even know this is happening. This DOL rule will specifically prohibit these predatory advisers from taking this action. If the advisers don’t provide good reasons for a roll out, to establish that they are working in the participant’s best interests, these advisers could face sanctions. So, I suppose it is “big” in providing protection to participants, and it is “big” because now, predatory advisers need to take additional steps to ensure they aren’t crossing the line.
Is the industry ready for this?
Many fee-only and fee-based advisers can accommodate these rules immediately. The brokerage industry won’t be able to be as able to make swift changes. Stand-alone brokers don’t give “advice” unless it’s through an affiliated RIA. If they are already affiliated with an RIA, they also may give advice, but they must follow the rules. These fee-based advisers (brokers with affiliated RIA firms) may not want to be accountable, but they are surely able to be accountable.
What should consumers expect as a result of this? More paperwork? Will the new rule be confusing?
I’m not sure what the consumer should expect in regards to paperwork, if any. One of the reasons this rule was developed, in my opinion, is that brokers and fee-based firms got around giving fiduciary advice by having a client sign paperwork that indicated the broker / fee-based adviser was not responsible for giving fiduciary advice. In essence, if they got the client to sign a piece of paper that stated that the product was “suitable,” they skirted the higher fiduciary standard of care. I actually think this rule will put the paperwork burden back where it should be – on the advisers, requiring them to document how their rollover advice served the best interests of the client. It will become more difficult for that adviser to skirt around his or her fiduciary responsibility.
Will this be a difficult transition for some advisers?
Yes, it will be difficult for some advisers, especially those who try to skirt their fiduciary responsibility. The brokerage industry will likely be shut out of being able to do rollovers, unless it accepts fiduciary duty. I find that unlikely.
How does this rule affect AMDG Financial?
This rule is basically a non-event for us. We have always acted in our clients’ best interest; we accept, gladly, the fiduciary duty, the duty of loyalty to our clients. I think this rule provides a level playing field. Many participants never knew, or may never know, that their brokers or non-fiduciary advisers took advantage of them. No check and balance existed previously. The DOL rule helps provide that check and balance. The rule can’t likely prevent a bad actor from perpetrating a bad rollover, but it does put in place a measure that can be used to hold bad actors responsible. If they violate these rules, they can lose their license to practice. That is a huge step in the right direction. Responsibility is an important aspect of fiduciary duty.
If you have questions about the DOL’s new Fiduciary Rule, I encourage you to call us. We exist to serve your best interests, now and always.