Commentary: Much sooner than anticipated, the Department of Labor released its proposed new fiduciary compliance rules for investment advisers. The rules are aimed specifically at brokers who currently provide investment advice to clients under the "suitability" requirement (which currently exempts brokers from being fiduciaries).

Background: Fiduciary care vs. suitability

Investment advisers working for Registered Investment Advisory firms are required to be fiduciaries, providing investment advice that keeps their client's best interests first and foremost. Advisers who work for brokerage firms are currently allowed to exercise a lower standard of care, called suitability, when providing investment advice to their clients.

Suitability can best be defined as recommending investment options or products that are appropriate for the investor. There is no requirement that an investment adviser working for a brokerage firm put a client’s best interests before his/hers or the brokerage firm’s. Many observers believe this leads brokerage firm advisers to recommend investment products that are best for the adviser and his/her employer while only suitable for the client. The new proposed rules require that all advisers providing investment advice will be fiduciaries.

Suitability may soon be history

If the proposed regulations are finalized in a format similar to how they were proposed, the suitability standard that brokerage firms have used for decades would be eliminated. In its place would be a new set of rules that investment advisers at brokerage firms would need to adhere to requiring significant disclosures on compensation and conflicts of interest. It is thought that these additional compliance costs might force many brokerage firm advisers to convert to a RIA business model.

The impact on plan sponsors

Only positive changes are likely for plan sponsors as a result of any new fiduciary requirements issued by the DOL. The new proposal will provide greater transparency regarding fees and a uniform definition of who is a fiduciary. Many plan sponsors are currently confused about whether their investment adviser is or isn't a plan fiduciary. Should these regulations become final, this is an issue that plan sponsors will no longer have to worry about since any adviser would be a fiduciary.

What's next

There will now be a 75-day public comment period that will allow the DOL to collect thoughts and comments. Following that, there will be a public hearing scheduled to review the proposal. The DOL will then take all the feedback it receives and incorporate it into a final set of regulations. As a result, it is likely that we are still a year or more away from receiving final regulations on this issue. In addition, the brokerage community and Republican legislators have vowed to vigorously oppose any new fiduciary regulations. If a bitter fight ensues, final regulations may be pushed even further into the future.

 Robert C. Lawton, AIF, CRPS is president of Lawton Retirement Plan Consultants, LLC, an RIA firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He may be contacted at or 414.828.4015.

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