Yesterday, the Department of Labor issued its final fiduciary compliance rules for investment advisers working with retirement accounts. The rules are specifically aimed at brokers who provide investment advice to clients under the “suitability” requirement, which had exempted brokers from being fiduciaries. The issuance of these final regulations ends a long war that the brokerage industry waged against regulators, employing all manner of threats to avoid fiduciary responsibility (e.g., a ridiculous claim that small clients will no longer be able to afford investment advice) and spending millions on intense political lobbying. Who won? Remarkably, plan sponsors!
A fiduciary’s responsibilities are both ethical and legal. They are required to provide advice that is in the best interests of their clients rather than themselves and cannot benefit personally from advice shared. Fiduciaries must adhere to the prudent person rule, which states that advisers should act with skill, care, diligence and use good professional judgment. Additionally, fiduciaries should never mislead clients, always provide full and fair disclosure of all important facts and avoid conflicts of interest. All of that seems reasonable, doesn’t it?
Retirement plan advisers working for registered investment advisory (RIA) firms are now required to be fiduciaries and to provide investment advice that keeps their client’s best interests first and foremost.
Advisers who work for brokerage firms had been allowed to exercise a lower standard of care to avoid fiduciary responsibility, called suitability, which can best be defined as recommending investment options or products that are appropriate—or ‘suitable’—for the investor. But there was no requirement that a broker put a client’s best interest before his or her own. This sometimes led brokers to recommend investment products that were best for the broker and his firm, while only suitable for the client. The new rules change that.
The impact on plan sponsors
Most retirement plan sponsors have only a hazy understanding about what a fiduciary is and if their adviser is acting as one. Plan sponsors working with brokers who haven’t been acting as fiduciaries will be approached by them as they begin to define a new working relationship. They are likely to outline relationships that feature higher costs. There will also be additional paperwork to sign, which describes their fiduciary limitations.
Quote"A fiduciary’s responsibilities are both ethical and legal."
You don’t have to accept this at face value. There are plenty of RIAs out there who are eager to work with you in a cost-effective way and who weren’t dragged kicking and screaming into the new fiduciary world. These regulations were created to benefit you, the plan sponsor, and you shouldn’t feel that you have to work with a broker who views these new responsibilities as a burden. Any adviser who whines and complains about taking your best interests into account when providing investment advice is not someone you should be working with.
Those brokers and advisers who weren't acting responsibly as fiduciaries will be re-evaluating their business models. Many will find it difficult or impossible to adhere to their new fiduciary duties, and some may exit the business. All advisers will have until Jan. 1, 2018 to comply with the new regulations. Now may be a good time to re-evaluate the relationship you have with your adviser—at the very least to gain clarity on his fiduciary relationship with your 401(k) plan.
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