About the New Rules for Fiduciary Reasonability

Earlier this month, the U.S. Department of Labor (DOL) published a rule change that applies the fiduciary standard to brokers and financial professionals who provide retirement advice. The intent of the rule is to ensure that financial professionals offering retirement advice keep their clients’ best interests in mind. It is a significant change from the “suitable” standard that is in place now, and effectively tightens the standards on retirement-account advice.

The reason the DOL published this rule is to protect investors by helping them make the most cost-effective savings decisions and get rid of hidden fees. For IRA holders working with brokers who take commissions, under the fiduciary standard, investors must sign a best-interest contract (BIC); which is an agreement between advisers and investors that only allows investors to sell investments that are in the client’s best interest and discloses the adviser’s potential compensation.

Due to the new regulatory requirements, some advisors might drop small investors with small IRAs. Additionally, post-regulation, advisers will have to learn how to have conversations with clients that do not trigger conflicts of interest. For example, when dealing with clients who did not sign a BIC, advisers are limited to serving in an educational role on commission-based investments, instead of making direct recommendations.

Furthermore, while the rule is aimed at financial advisors who provide retirement plan services, it also affects compliance obligations and costs for plan sponsors as well, such as human resources plan managers. The rule holds employers and plan managers to the fiduciary standard, and they must start learning the initial steps they should take towards compliance, as well as develop a long-term plan. Plan managers are responsible for asking their financial services advisors, “Are you a fiduciary to my plan?” and must document the question and the response.

The rule was published on April 8, 2016, and goes into effect on April 1, 2017, and includes a transition period from April 1, 2017 to April 1, 2018. For more information, read the DOL’s fact sheet that highlights key aspects of the final rule, and a chart that details the differences between the proposed and final rules.