Labor Department Sets New Fiduciary Standard for Retirement Advice

Monday, May 9, 2016

The U.S. Department of Labor, which regulates tax-advantaged retirement savings accounts, is holding more financial advisors to a "fiduciary standard," which requires financial advisors to put clients' best interests ahead of profits. A new set of rules regulates any investment advice that is a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, as to the advisability of buying, holding, selling or exchanging securities or other investments, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA, recommendations as to the management of securities or investment property, including recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice/investment management services, selection of investment account arrangements and recommendations with respect to rollovers, transfers, or distributions from a plan or IRA.

Until now, financial advisors were subject to a fiduciary standard on an ad hoc basis, depending on state law, and when registered as investment advisors with the SEC. Many brokers and other self-described financial advisors are held only to a “suitability standard,” under which they need only make investment recommendations that are suitable for their clients, but not necessarily the best option.

Highlights of the rule include:

  • Financial brokers must now act in clients' "best interest" when giving retirement investment advice. 
  • Firms must ban financial incentives for advisers not to act in the client's best interest. 
  • Firms must disclose compensation arrangements on a webpage and by making sure customers are aware of their right to all fee information. 
  • Firms and advisors may continue receiving the most common forms of compensation for offering investment advice to retail customers and small-plan sponsors. The rule also does not limit the types of assets they can invest in. 
  • Firms are allowed to sell insurance products like variable and indexed annuities under the best interest rule. 
  • The rule allows firms and their advisers to recommend proprietary products. 
  • Education is not included in the definition of retirement investment advice, allowing advisers to offer basic information without acting as fiduciaries. 
  • Under the rule, financial advisers may communicate with potential clients before signing a contract. However, firms must eventually tell new clients in writing that they are acting in their best interest, and any advice given before a contract is signed must be covered by the contract and meet the best interest standard. 

Firms have a year or more to adjust to the new rule. It will take effect in part on April 2017, with full implementation in January 2018.

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