Current fiduciary rules mean greater protection for investors

Posted by Charles Middleton on 03/06/2018

Q: What new fiduciary rules went into effect in 2017, and who do they impact?

A: The first phase of the U.S. Department of Labor's new fiduciary or conflict of interest rule went into effect in 2017. The rule expands the definition of a fiduciary within the Employee Retirement Income Security Act of 1974 to include all individuals who provide “investment advice” to retirement plans, plan sponsors, fiduciaries, plan participants, beneficiaries, IRAs and IRA owners for a fee or other compensation. This includes recommendations to buy, hold, sell, or exchange securities or other investments, including IRA rollovers, transfers, or distributions. It also includes recommendations about investment strategies, portfolio composition, and selection of other investment advisers or management services. These standards require investment advisers to comply with impartial conduct standards, working for their client's best interests, charging no more than reasonable compensation for services and making no misleading statements about investments, fees or conflicts of interest. It also subjects these “new” fiduciaries to ERISA's prohibited transaction rules. The rule impacts many financial advisers who service retirement accounts, as well as many retirement investors. Currently all individuals who provide investment advice to retirement plans under the expanded definitions must fully comply with the remaining conditions and exemptions by July 1, 2019.

Q: What was the rationale behind this new rule?

A: Proponents of the new fiduciary rule claim that developments in financial services and investment products since the passing of ERISA in 1974, particularly the rise in rollovers from ERISA plans to IRAs, necessitated updates to the fiduciary standards. Particularly, the department and rule proponents claim the new rule protects retirement investors by, for example, creating transparency about fees and commissions that can significantly reduce retirement funds and by discouraging investment recommendations that benefit advisers more than investors through their commission structures.

Q: How will this change affect clients working with financial advisers on existing investments, as well as moving forward with new ones?

A: While many financial advisers are already subject to the fiduciary duty standard, it's new to some. In the new environment, retirement investors might notice some of the following changes at financial institutions and broker-dealers providing retirement plan services: An increase in disclosures about fees and compensation in connection with many retirements plans; Different range of investment products as advisers move away from products that use commission-based structures, e.g. some annuities, due to concerns over the potential appearance of a conflict of interest; fewer personnel servicing retirement accounts to avoid claims that some routine interactions qualify as investment advice; a broader use of automated investment advice, or robo-advisors, in an effort to cut down on human interactions potentially subject to the broader standards; and changes in compensation and fees for retirement accounts as advisers move away from commission-based agreements, typically used for small or medium-sized retirement accounts. Clients should review any new literature and agreements closely to spot these changes. Clients also should remember the fiduciary rules don't keep financial advisers from following directions from clients to invest in certain products of their own choosing, if desired.


Published The Oklahoman, March 6, 2018