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What is the Status of the DOL Fiduciary Rule?

If you work in the financial services industry, you’ve likely been following the strange and changing path of the Department of Labor (DOL) Fiduciary Rule. The new rule increases the ethical standard of investment advice from a suitability standard to a fiduciary standard.

The Fiduciary Rule impacts anyone giving advice on retirement accounts for compensation, such as financial advisors, brokers, and insurance agents and requires these professionals to put the interests of the client first at all times for retirement accounts.  

History of the Fiduciary Rule

This expansion of ethical standards was created through an addition to “The Employee Retirement Income Security Act of 1974 (ERISA)”. Initial discussions of proposed changes go back to 2010, with the financial industry being put on notice of coming changes in 2015 by President Obama.  

On April 14th, 2016 the Office of Management and Budget (OMB) approved the rule, with President Obama having its implementation fast-tracked. The originally scheduled effective date was set for April 10th, 2017 for the first phase of the rule, and January 1st, 2018 for the final phase.  

However, after the change in presidential administrations, the first phase was delayed until June 9th, 2017 and the final phase delayed until July 1st, 2019. More recently, the 5th Circuit Court of Appeals vacated the rule by a 2-1 decision.

Currently, the first phase of the rule is still effective while the overall rule may go before the Supreme Court to decide if it should be revoked completely or not.1 On May 7th, 2018, the DOL issued a Field Service Bulletin to outline a “Temporary Enforcement Policy” while not pursuing prohibited transaction claims against retirement advisors.

Reaction From the Financial Services Industry

When the rule was first published the reactions were very diverse. Many industry groups strongly supported the changes including the CFP Board, Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA).

On the other hand, the traditional wealth management companies such as Edward Jones had to make significant changes to their business structure and were negatively affected by the increased compliance and regulatory changes. Volumes of letters were sent to the DOL before it was implemented to comment on how the ruling would affect their company and even the US Chamber of Commerce fought to have it revoked.1

Current Impact From the Rule

The largest changes from the rule continue to affect compensation and employer-sponsored plan rollovers (401k/403b). As part of the rule, financial advisors and companies must work to eliminate conflicts of interest when recommending investments to their clients in retirement accounts.

Under the rule, a carveout exists called a “Best Interest Contract Exemption” or “BICE” which allows conflicted compensation such as commissions.2  Following the partial implementation of the rule, most companies started to limit their investment options and moved toward lower conflicted business models such as wrap accounts or advisory accounts charging a flat rate instead of commissions on transactions.

The DOL rule made recommending that a client rollover their employer retirement plan into an IRA a fiduciary recommendation. A significant source of new assets for financial companies is from rollovers. This higher standard forces advisors to actually recommend the rollover if it is in the best interest of the client or advise the client not to move their money.  

Firms now are required to educate their clients on all the options they have available. Generally, concerning retirement plans, clients may leave the money where it is, move it to their new employer’s plan, roll it over to an IRA, or take it out and pay the tax consequences. This is a significant shift from the past where advisors could advise many clients to roll their money over to IRAs without explaining the other options available.

Going Forward

Currently, the first phase of the DOL Fiduciary Rule still stands, while the DOL isn’t actively pursuing claims against companies who aren’t complying. More or less, the long-term outlook for the rule is that it will likely be revoked and replaced with a “Best Interest Rule” from the SEC, which would raise standards on financial advisors on all accounts, not just retirement accounts.  

It should be noted that the proposed  “Best Interest Rule” is not a fiduciary rule, but gets very close to fiduciary status without actually making them official. Currently, the SEC is working on developing their rule in an effort to fix some of the issues they found problematic with the DOL rule.  

Lasting Impressions with the Public

No matter what happens with the DOL Fiduciary Rule or the SEC Best Interest Rule, the general public now has a much greater awareness of the fiduciary status of financial advisors. Clients also are scrutinizing the business models and compensation of financial advisors more than ever and looking to work with an advisor who is a fiduciary.

This is likely to have a lasting impact on our industry, as the sales mentality of the past is going away and consumers want genuine advice in their best interest. Advisors can wait for the government to mandate that they act in the best interest of their clients or they can start aligning business practices to meet the demands of the clients of the future.


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