<img height="1" width="1" style="display:none;" alt="" src="https://dc.ads.linkedin.com/collect/?pid=289257&amp;fmt=gif">
Sign Up
Log In
Sign Up
Log In


Free Peer Benchmark Analyzer

The Fiduciary Rule is Fast Approaching

Kevin Connor
Jan 24, 2017

What Financial Professionals Need to Do Now to Prepare

The Department of Labor fiduciary rule will soon be in effect, and that means all financial professionals will be required to put the best interest of their clients first when working with their retirement accounts. As an experienced financial advisor, you already put the needs of every client first, and you work hard to provide the best returns with the least possible amount of risk.

Does the fact that you always put the best interests of your clients ahead of your own mean that you can simply sit back and do nothing as the new fiduciary rule takes effect? The simple answer is no, and there are things you need to be aware of long before the April 10, 2017, implementation of the DOL fiduciary rule.

One of the first things to know is that the new rule significantly broadens what counts as fiduciary investment advice. Another thing to keep in mind is that the new fiduciary rule will impact how you deliver investment information and guidance for qualified retirement plans. This fiduciary rule will apply to both employer-sponsored retirement plans and individual plans like IRA accounts.

The Goal of the DOL Fiduciary Rule

The new fiduciary rule from the Department of Labor was implemented with one simple goal in mind - to better protect individuals saving for retirement and shield them from any conflicts of interest when seeking investment advice and guidance. Even though the vast majority of financial professionals are honest and trustworthy, a few bad apples spoiled it for the rest.

The fact that some investment advisors have been less than honest in the past led to the new fiduciary rule, and now every financial professional, including those who already put their clients' best interests first, need to get ready.

There are a few additional reasons why the Department of Labor felt that the new fiduciary rule was necessary. For one thing, there has been a significant shift from traditional employer pension plans to self-directed retirement programs like 401(k) and 403(b) plans. The steady decline in company-sponsored pensions has shifted the burden, and the risk, of retirement saving from employers to employees, leaving many workers wondering how they will make ends meet after their working years are over. 

Those workers often turn to financial professionals for advice and guidance, and for help in investing their precious retirement funds. The heightened complexity of investment products and growing number of mutual funds, annuities, and other options has also caused many employees to seek professional advice, leading to an increase in business for financial advisors and wealth management experts.

The new Department of Labor fiduciary rule aims to help those workers get the investment advice and guidance they need, free of conflicts of interest and other potential problems. By requiring financial advisors and wealth management firms to put the best interests of their clients first, the new fiduciary rule is designed to make retirement saving easier and less stressful for everyone involved.

What is the Fiduciary Rule?

At the heart of the new Department of Labor fiduciary rule are the fiduciary and conflict of interest provisions. These requirements apply to both ERISA retirement plan advisors and IRA accounts. Starting on April 10, 2017, all financial professionals will be required to operate under a fiduciary standard and avoid conflicts of interest that could harm their clients or increase their investment costs.

Statistics show that the fiduciary rule should indeed save money for retirement plan participants. Some surveys have shown that employees can lose as much as 1 percent a year in higher fees and other costs, and even more when financial professionals recommend underperforming or unsuitable investments for their workplace retirement plans and IRA accounts.

In its simplest form, the DOL fiduciary rule redefines the meaning of the term "fiduciary investment advice" for both IRA accounts and ERISA plans. The new law expands the kinds of advice the term covers and brings more advisors under the fiduciary umbrella.

As a result of those changes, some recommendations that would not previously have been disallowed may now be prohibited under the new rule. That may require independent financial advisors and the owners of financial advisory and wealth management firms to change the way they do business, from the compensation structure for their brokers to how they educate their clients.

There are some exemptions build into the Department of Labor fiduciary rule, including provisions that allow insurance-only agents to continue selling some kinds of annuities for their retirement plan clients. There are also exemptions that cover client education, and that makes it important for financial professionals to understand the distinction between education and investment advice.

Even after the new DOL fiduciary rule is in place, broker-dealers, advisors and other professionals may still be able to receive common forms of compensation, providing that they are willing to adhere to the strict standards intended to protect their clients. In short, those financial professionals will need to make sure the advice they give is completely impartial, in the best interest of their clients and not influenced by any commissions or other forms of compensation.

Will the DOL Fiduciary Rule Apply to Me?

If you are a financial professional or work in the wealth management industry, chances are good the rule will apply to you. While certain fee-only financial planners are already following the strictures of the new fiduciary rule, most others in the financial planning industry will be impacted in some way by the new Department of Labor regulations.

The good news is that the new DOL fiduciary rule should help the most honest and trustworthy financial advisors and wealth managers while hurting the shady operators who have been giving the entire industry a bad name. If you have always put the best interests of your clients first and scrupulously avoided conflicts of interest, you should have little to worry about once the new fiduciary rule takes effect. You do, however, need to understand the rule and what it means, as doing so will help you avoid misunderstandings and inadvertent violations of the law.

Subscribe by Email