The fiduciary rule: What advisers need to know today

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The Department of Labor’s partial implementation of the fiduciary rule June 9 means that the game has just changed for retirement plan advisers, including those who already abide by a fiduciary standard.

Here are three things that advisers need to know:

1) No fee structure is free of conflict. Many existing fiduciaries claim that through their flat-fee structure, they are free of conflicts in their advice to a plan or its participants. This is false. Even with completely level fee arrangements, at some point, there will be a conflict. For example, say an adviser is paid a flat fee calculated as basis points on plan assets. In this scenario, the adviser’s compensation is aligned with the success of the plan, measured in growth of assets. Participant-level advice is objective, as no investment yields a higher fee for the adviser. However, plan design choices have an inherent, unavoidable bias. If an adviser is compensated by percentage of plan assets, implementing auto features -- such as enrollment and escalation -- have a linear relationship to their potential compensation.

As fiduciaries, advisers have an obligation to disclose any conflict of advice, even when that advice is made with the best interest of the end investor. Givers of advice should not shy away from these disclosures, which include the Best Interest Contract Exemption. Doing so builds confidence with clients that you are always in their corner.

Also see:Win the battle, lose the war? The fiduciary rule moves forward.”

2) The cheapest option is not necessarily the best option. As fiduciaries, expenses are certainly a factor when recommending investments to plan sponsors. However, advisers must be mindful that the cheapest option may not be the best option for the plan. Remember that all advice must be made with the end participant in mind, and, as a fiduciary, there must be a process in place for analyzing not only the investment’s worth, but how that investment fits with the goals of the plan and participants. A thoroughly vetted and prudently selected investment option with reasonable fees can still be included in plans. But advisers should document and retain the rationale behind any investment recommendation, including those for low-cost passive investments.

Also see: "Fiduciary rule enactment could bring adviser consolidation."

3) Understand the basis of recommendations. No longer can recommendations be made in a vacuum. Advisers must continuously monitor and revise the strategies in place for the success of plans and participants. This means researching and understanding the demographics of the plan, the needs of the organization and the progress of the plan’s participants.

It is worth noting that there is still the possibility of future changes to the fiduciary rule. However, the industry will keep moving in this direction regardless as clients want to know their consultants are working in their interests. As advisers, we have the opportunity to progress our industry for the betterment of society and investors by acting as fiduciaries regardless of regulation. We should embrace this responsibility. Those that don’t can expect to be left behind.

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