On April 6, the Department of Labor (DOL) published the final watered-down version of the conflict-of-interest rule it proposed in April 2015. The new regulations require those who advise on retirement savings plans to move somewhat closer to adhering to the “fiduciary standard” our firm has long held dear. Because we’ve always been fiduciaries, these regulations won’t affect our relationships with 401k plan sponsors or individual clients with retirement accounts. Despite their efforts to derail the plan, Wall Street’s broker-dealers didn’t win this time!
- As an employer who offers a qualified retirement plan or an individual whose advisor oversees my individual retirement account, how will this new rule affect my relationship with my advisor? If you have chosen to work with a fiduciary advisor and investment manager like O’Reilly Wealth Advisors LLC you are fortunate and your relationship will not change. Your advisor already is held to the highest standard and committed to doing what is best for you, your plan and its participants.
- A Securities Attorney’s Opinion: Andrew Stoltmann, a Chicago securities attorney, quoted at wealthmanagement.com said, “It’s a watered-down version of what many of us thought would be a stringent fiduciary duty. There are carve-outs and holes in this rule that you could drive a pretty big Mack truck through.”
- 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 past 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 conflict-of-interest rules that apply to retirement plan and IRA advisors. 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.
- 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 somewhat closer to fiduciaries for retirement plan and IRA purposes, affecting the compensation arrangements available to them.
- Is there anything I must do now that I didn’t before? Not if you are already working with an independent registered investment advisor like O’Reilly Wealth Advisors LLC. We will continue working with you and your plan participants the same way we have in the past, putting your best interest first.
- What's changed? What’s different from before?The new rules require broker-dealers who work with retirement plans to state that they will act only what’s in the best interest of their clients and to disclose any conflicts of interest. Broker-dealer 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 watered-down form, the rule defines who is considered a fiduciary investment advisor. Broker-dealers, insurance agents and others that act as investment advice fiduciaries can continue to receive a variety of common forms of compensation (such as commissions) as long as they are willing to state that they will 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? Registered Investment Advisors (RIAs) such as our firm, who already are considered retirement plan fiduciaries, do not receive compensation that varies by investment, so there is no impact.
- For people with individual retirement accounts or participants in 401(k) plans served by broker-dealers, the new regulation should provide a little transparency. We hope to see the rule result in better investments offered (and better advice given) to retirement plan participants served by broker-dealers.
- The main impact falls on broker-dealers. They 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 watered down fiduciary standard.
- 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.
- You may be asked by your broker-dealer to sign a “BICE”. BICE stands for “best interest contract exemption.” These describes the hoops a non-fiduciary advisor will have to jump through to continue getting paid in ways that might be considered unworkable in a true fiduciary arrangement, like sales commissions or revenue-sharing arrangements.