The Department of Labor’s (DOL) fiduciary rule has been through many twists and turns since its introduction in 2010. As an investment advisor, it’s crucial you understand this evolving regulation.
In this article, we’ll provide an in-depth look at what the DOL fiduciary rule entails, its origins and current status, and how it could affect advisors in different roles when/if fully implemented. We’ll also share insights on steps advisors can take to prepare.
What is the DOL Fiduciary Rule?
At its core, the DOL fiduciary rule expands the types of retirement investment advice that will be held to ERISA fiduciary standards. This represents a major shift in how advisors across different business models approach working with 401(k) plans, IRAs, and other retirement accounts.
Broadening the Definition of Fiduciary Investment Advice
Under previous rules, advisors were considered fiduciaries only if their advice met a five-part test. The advice had to be provided:
- On a regular basis
- Pursuant to a mutual agreement
- For compensation
- On the value or advisability of investing in securities
- As the primary basis for investment decisions
Meeting all five criteria exempted many advisors from fiduciary requirements when working with retirement accounts.
The DOL fiduciary rule aims to significantly expand the types of retirement investment advice that trigger fiduciary status. It does so by eliminating several of these restrictive criteria, such as the regular basis requirement.
Any personalized recommendation to a retirement plan, participant, beneficiary, or IRA owner could potentially be considered fiduciary investment advice under the new definition. This is true even if it’s a one-time interaction.
Key Components and Requirements
At its core, the DOL fiduciary rule requires all financial advisors providing retirement investment advice to:
- Act in the best interests of their clients
- Put their clients’ interests above their own
- Disclose any conflicts of interest clearly
Advisors held to a fiduciary standard under the rule must provide advice that adheres to Impartial Conduct Standards. This means:
- Charging only reasonable compensation
- Refraining from making misleading statements
- Providing advice in the client’s best interest
The DOL also aims to apply fiduciary requirements more broadly across all tax-advantaged retirement accounts. This includes 401(k)s, IRAs, and other plans or accounts subject to ERISA or the Internal Revenue Code.
Previously, fiduciary obligations differed for ERISA retirement plans compared to IRAs. Now, IRAs will get protections more similar to those provided to ERISA plan investors.
Overall, the DOL fiduciary rule significantly expands the circumstances under which an advisor can be considered a fiduciary. Any personalized recommendations made to a retirement investor must put their interests first.
Evolution of the DOL Fiduciary Rule
Given the potentially sweeping impacts of the DOL fiduciary rule, it has faced controversy and an uncertain path since its inception. Here’s an overview of how the rule has evolved over time:
2010: Initial Rule Proposal and Withdrawal
The process began back in 2010 when the DOL first proposed amendments to the definition of fiduciary investment advice under ERISA.
This initial proposal faced broad criticism and pushback from many corners of the financial services industry. Opponents argued the rule would limit options for middle-class investors and raise the costs of advising small retirement accounts.
In 2011, the DOL withdrew its initial proposed rule and went back to the drawing board.
2015-2016: Reproposal Finalization and Implementation
Efforts to expand the fiduciary definition gained new life in 2015. President Obama strongly urged the DOL to update rules to better protect retirement investors from conflicts of interest.
In April 2015, the DOL issued a re-proposed version of the fiduciary rule that aimed to address earlier concerns. After receiving additional comments, the final rule was released in April 2016 with an initial applicability date of April 2017.
Legal Challenges and Current Status
The DOL fiduciary rule has faced ongoing legal challenges since its finalization. Most significantly, in 2018, the Fifth Circuit Court of Appeals vacated the rule in a 2-1 decision.
The Fifth Circuit found that the DOL had overstepped its authority and that its new fiduciary definition conflicted with existing federal securities laws. This ruling halted the implementation of the 2016 final rule.
Since then, the DOL has gone back to the drawing board again. They aim to propose an updated version of the rule called the “Retirement Security Rule” in 2024. It will likely build off the earlier version while addressing the Fifth Circuit’s concerns.
Retirement investment advice is once again governed by previous rules and the five-part test for fiduciary status. However, advisors expect the DOL will continue efforts to expand the fiduciary definition in a revised proposal.
So, while the DOL fiduciary rule’s future hangs in the balance, most industry observers believe some enhanced version will ultimately move forward.
How Might the DOL Fiduciary Rule Impact Advisors?
If implemented in some form, the DOL fiduciary rule will undoubtedly impact many advisors. However, the scale of change depends on their business model and compensation structure.
Here’s a look at how different types of advisors may be affected if the rule takes effect:
Broker-Dealers and Insurance Agents
Advisors who earn commissions through broker-dealer and insurance channels face the biggest potential disruptions from the DOL fiduciary rule.
Under the new standards, they would have to provide retirement investment advice under a fiduciary standard of care. Yet their compensation often involves conflicts of interest that are prohibited for fiduciaries.
To continue receiving commissions, they would need to either restructure compensation or comply with exemptions like the Best Interest Contract (BIC) Exemption.
The BIC Exemption allows commission-based advisors to continue receiving variable compensation as long as they adhere to Impartial Conduct Standards. But taking advantage of exemptions like this requires extensive disclosures and compliance efforts.
Many analysts expect the rule could accelerate the shift away from commission-based compensation if finalized as proposed. Advisors may need to move towards fee-based models to adapt.
Registered Investment Advisors
In contrast, Registered Investment Advisors (RIAs) already operate under fiduciary standards that align with the intent of the DOL rule.
RIAs and RIA representatives are held to a fiduciary duty under the Investment Advisers Act of 1940. This requires serving clients’ best interests at all times.
Because fiduciary requirements are already ingrained in their business model, the DOL fiduciary rule may have limited direct impacts on RIAs.
Some additional adjustments may be necessary related to compliance procedures, contracts, disclosures, and supervision. However, the underlying fiduciary principles remain consistent with RIAs’ current obligations. For many, it would likely require minimal change.
Financial Planners
For financial planners, the impact of the DOL fiduciary rule depends heavily on the compensation model.
Fee-only planners who receive no commissions or third-party compensation already operate in a fiduciary capacity. Like RIAs, they would likely see very limited change aside from some documentation adjustments.
But for planners who earn commissions or other variable compensation, the DOL fiduciary rule could require significant shifts. They may need to eliminate commissions from retirement accounts, move clients to fee-based arrangements, or meet exemption conditions.
The rule pushes financial planners away from commission structures – at least when advising on retirement accounts. Some may need to reconsider their business models if the rule takes effect.
How Can Advisors Prepare If the Rule Is Finalized?
Given the likelihood that some version of the DOL fiduciary rule will ultimately move forward, advisors should begin preparing now.
When it comes time for implementation, those who have taken steps to get ready will have a major advantage. They can pivot smoothly while competitors may struggle to play catch-up.
Here are some areas advisors can proactively address to get ahead of potential compliance requirements
Update Contracts, Disclosures and Compliance Procedures
Carefully review client contracts, disclosures, and compliance policies in light of the DOL rule’s provisions. Identify any areas that may need revisions to align with the rule’s requirements. For example, you may need to update client agreements and disclosures to clearly establish your fiduciary status and describe how you will adhere to Impartial Conduct Standards.
Evaluate whether your current supervisory procedures are sufficient to monitor advisor activities under the new fiduciary requirements. Work with your compliance team or legal counsel to identify any enhancements needed.
The goal is to proactively update key documents and processes rather than scrambling later. Taking a methodical approach now will pay dividends down the road.
Operational Changes
Implementing the DOL fiduciary rule requires more than just updating documents. Advisors will also need to adjust operations to align with the rule’s requirements.
Some key areas to address include:
- Reviewing workflows to identify potential conflicts of interest
- Enhancing oversight and supervision of retirement account recommendations
- Upgrading technology to better track fees, commissions, and compensation
- Conducting training to ensure advisors understand the new fiduciary responsibilities
The goal is to embed fiduciary processes throughout the operational infrastructure. This reduces compliance risks as advisors provide retirement investment advice daily.
Technology Upgrades
Technology plays a crucial role in supporting DOL fiduciary rule compliance. Advisors should assess current tech stacks and identify potential upgrades needed.
Examples may include:
- Added CRM capabilities to track client interactions and recommendations
- New portfolio management software to monitor investment costs and performance
- Enhanced compensation tracking and reporting features
- Digital tools to improve fee disclosures and transparency for clients
The right technology provides oversight and ensures advisors adhere to impartial conduct standards when advising retirement accounts.
Client Communications
As with any major regulatory change, clear client communication is critical during the transition.
Advisors should develop a strategy for explaining the DOL fiduciary rule to clients and what it means for their advisory relationship. This demonstrates the advisor’s ongoing commitment to the client’s best interest.
Communication should reinforce why the client can feel confident in the advisor’s recommendations and reassure them of a smooth transition. Advisors should position themselves as trusted partners in navigating the changing environment.
Tailored RIA Compliance Solutions for Changing Regulatory Environments
While questions remain on what form the DOL fiduciary rule will ultimately take, retirement investors deserve access to quality guidance for their financial futures.
As an RIA compliance firm, My RIA Lawyer shares the same goal as investment advisers – helping Americans gain financial security and peace of mind in retirement. By working with advisory firms, My RIA Lawyer can help adapt compliance programs to regulatory changes while keeping clients’ interests first.
To learn more about how My RIA Lawyer can support fiduciary and compliance needs, interested parties can visit the firm’s website at https://www.myrialawyer.com/ to get in touch. The legal and compliance experts are prepared to provide customized guidance to RIAs wanting to maintain robust compliance amidst a shifting regulatory landscape.
