Softer New Fiduciary Rule Released

The Department of Labor published this morning a new fiduciary rule aimed at retirement investing that requires financial advisors to operate with their clients’ best interests at heart, and avoid conflicts of interest. The draft rule will need to be approved by Congress, and would not be fully effective until January 2018.

At the heart of this regulation is the very definition of “fiduciary status.” In general terms, the impetus of the regulation is to make sure that people investing in 401(k)s and IRAs and other retirement accounts are receiving investment advice that meets a fiduciary standard—in other words, that’s delivered to them with their best interests at heart.

Industry Concerns Aired

For the better part of a year, the DOL had been fielding industry comments on its proposed rule, the bulk of which highlighted the regulations’ impractical complexity. Comments from the industry pointed to concerns about definitions—what constitutes advice and what constitutes investor education—and raised questions about fee structures and advisors’ ability to pitch their own proprietary products, among other things.

The DOL listened. The new rule unveiled today offers great detail as to what meets a fiduciary requirement. Here’s a handy breakdown of the draft rule.

Some of the highlights include details on what types of information are considered nonfiduciary investment education, such as plan information, and what types of investment advice fall under this new fiduciary requirement; namely, any recommendations to move money from one investment to another. It requires better disclosures all around, and contractual agreements that ensure investors know what they are getting.

Softened Language On Fees

There’s also language in there softening the original proposed rule around fees by allowing advisors to remain under a commission-based model if that’s in the best interests of the client, or to operate under a fee-based model.

It also doesn’t require advisors to always pitch the lowest-fee investment vehicle unless that is what’s best for the client.

Initial reaction to the rule has been mixed.

To FactSet Director of ETFs Dave Nadig, the rule is a boon for investors and for the ETF industry alike.

“While the rule backed down from some of the more vigorous parts of early proposals, it makes the important change: Most advisors will become true fiduciaries,” Nadig said. “The shift from ‘suitable’ to ’best interest’ may seem like Washingtonian semantics, but it's not. Going to a job interview in flip-flops and shorts might pass a ‘suitability’ test, but it sure isn't in the candidates’ ‘best interest.’”

‘Great News For ETF Industry’

“Overall, this is great news for the ETF industry,” Nadig added. “For many kinds of investors, ETFs are the cheapest, most tax efficient, most flexible products on the market. It's also great news for index products in general. A fiduciary advisor would need to feel confident they could prove—potentially in court—that they are better than average at picking active managers. That's a pretty high bar.”

To Ritholtz Wealth Management CEO Josh Brown, there’s little to be excited about. “My initial read on the DOL's final fiduciary rule: Literally nothing changes,” he said on Twitter this morning. “Biggest impact is added disclosures to websites. Seriously.”

And others, such as Financial Services Institute’s President and CEO Dale Brown, are reserving judgment for now.

“Affordable, objective financial advice is a critical component to hard-working Americans’ ability to save for a dignified retirement,” Brown said in a release. “The Department of Labor’s two earlier proposals were complex and unworkable. As we have said since day one, there is no compelling evidence this rule is necessary to achieve a uniform fiduciary standard, and the DOL’s own analysis fails to make the case.

Changing Retirement Landscape

“We will spend the coming days thoroughly analyzing this rule to determine if it protects Main Street investors by preserving their access to affordable, objective financial advice delivered by their chosen financial advisor,” he said.

The DOL’s new regulation strives to establish best practices for a changing retirement landscape.

“The Department’s conflict of interest final rule and related exemptions will protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits,” the DOL said on its website.

Contact Cinthia Murphy at [email protected].