In April of this year, the Department of Labor (DOL) came out with new legislation updating what's known as the fiduciary rule. While these rules are making headlines in the mainstream media, we want to provide information to help individual investors better understand how they impact those currently saving for retirement. Individuals who participate in an employer-sponsored retirement plan and/or have individual retirement accounts (IRAs) will potentially be impacted by the DOL fiduciary rule.
Fiduciary vs. Suitability Standard
The impetus behind the DOL fiduciary rule is to bring about a uniform standard of care for investors. There are currently two standards of care financial professionals need to adhere to depending upon the scope of work they are doing for their clients. (For more, see: The Devil Is in the Details with New Advisor Rules.)
One standard of care is the fiduciary standard. The Department of Labor’s fiduciary rule requires those advisors who provide investment advice to retirement plan participants and IRA owners to act and acknowledge their role as a fiduciary. In the role of fiduciary, the advisor is required to make prudent investment recommendations without any conflicts of interest, and their primary duty of loyalty is to the client.
However, currently there is also a second and lower suitability standard whereby a financial professional need only have a reasonable basis to believe that a recommended transaction or investment strategy be suitable for their client based on the client’s investor profile. A key distinction of loyalty is important in that a registered representative’s duty of loyalty is to the broker-dealer he or she works for, and not the client. The suitability standard generally applies to registered representatives of broker-dealers who are paid a commission for the investments purchased by their clients.
The DOL fiduciary rule mandates that registered representatives who currently offer products and advice under the suitability standard be held to the same higher standard of care and same rules as fee-based investment advisors who act in the role of fiduciary for their clients.
We already serve as fiduciaries as mandated by the DOL fiduciary rule and look forward to continuing to serve our clients' best interests as a fiduciary with the same diligence, thoroughness and openness we always have. We feel a uniform standard of care and more complete disclosures will only better educate investors and bring into the open potential conflicts of interest some advisors have. (For related reading, see: 6 Questions to Ask a Financial Advisor.)
Below are some key questions and answers that can further clarify the fiduciary rule.
Who is the Department of Labor?
The Department of Labor is a governmental organization whose mission is to: “Foster, promote and develop the welfare of the wage earners, job seekers and retirees of the United States; improve working conditions, advance opportunities for profitable employment; and assure work-related benefits and rights.”
What is a Plan Participant?
What is ERISA?
ERISA is an acronym for the Employee Retirement Income Security Act of 1974. ERISA establishes minimum standards for pension plans in private industry and also provides guidance in terms of who can provide investments, give advice and receive compensation for their work with ERISA plan participants. The most common type of ERISA plan is an employer-sponsored 401(k) or 403(b) plan. (For more, see: How to Find a New Financial Advisor Who's Right for You.)
What or Who Is a Fiduciary?
A fiduciary is someone who acts in the best interest of the client. A fiduciary has a duty to not be in a situation where personal interests and fiduciary duty are in conflict.
Will the DOL Rule Impact Me?
If you are saving for retirement, yes. This rule will impact anyone currently saving in a qualified retirement plan such as a 401(k), 403(b) and IRAs.
Is My Advisor a Fiduciary?
If your advisor is an IAR (investment advisor representative) with an RIA (registered investment advisor), they can act as a fiduciary. IARs generally have a form ADV Part IIB that outlines and discloses that they are a fiduciary and they must seek to avoid conflicts of interest with their clients in their advisory relationship. (For more, see: Why Roth IRAs Are a Great Idea for All Generations.)
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Cambridge and Flagship Capital Advisors are not affiliated.