In late August, the Department of Labor (DOL) announced its intention to delay the final phase-in for its new fiduciary rule from January 1, 2018 to July 1, 2019. What is the DOL’s fiduciary rule? Who’s affected by it and how? Why should you care and what can you do?
What Is the DOL Fiduciary Rule?
When first issued in April 2016, the DOL’s fiduciary rule was essentially intended to ensure that all financial professionals who are serving retirement plans or offering retirement planning advice on retirement accounts are held to the same fiduciary standard. That is to say, all financial professionals should be required to put their retirement planning clients’ highest financial interests ahead of their own when offering financial advice. (For more, see: The Coming Fiduciary Rule: Advisor and Client Impact.)
This makes a ton of sense, doesn’t it? In our opinion, it’s no more complicated than that or at least it shouldn’t be. While there are logistics and legalities to sort out, nothing should take away from the essential truth that the only financial advice worth heeding is the kind that represents your highest financial interests, and the best financial arrangements are those in which costs and conflicts of interest are fully disclosed, prudently managed and readily understood.
Unfortunately the DOL’s fiduciary rule has faced a rocky road to implementation. It’s been filled with potholes and landmines. For one, this rule (all 1,000-plus pages of it) is only designed to cover accounts subject to the Employee Retirement Income Security Act of 1974 (ERISA) or individual retirement accounts or other accounts that are subject to section 495 of the Internal Revenue Code. Think employers' retirement plans and individual IRAs. Why just these accounts? Because they fall under the jurisdiction of the DOL and the IRS for IRAs.
Even with this limited scope, the rule is being revisited under the current administration. It was originally scheduled to start its phase-in on April 10, 2017, with completion by January 1, 2018. Then the start date was delayed to June 9, 2017, while the transition period for the application of certain exemptions remained slated for January 1. Then, in August 2017, the DOL proposed delaying implementation of several of these exemptions until July 1, 2019. See ERISA attorney Fred Reish’s post Interesting Angles on the DOL’s Fiduciary Rule #63.
If you’re following the play-by-play action, this leaves retirement plan sponsors and participants as well as their would-be advisors in limbo land, with a rule that’s partly enacted but practically on hiatus. Have you ever been given a pain-alleviating prescription for yourself or your suffering child only to be told to take a number and wait interminably for its fulfillment? That’s how frustrated we are by the DOL’s fiduciary rule delay.
Who Is Affected by It?
Again, the DOL fiduciary rule only applies to retirement plan assets, leaving investors out in the cold with respect to the fiduciary advice they may or may not be receiving for the rest of their investments. In the absence of best interest, fiduciary advice, you’ll instead be advised according to the lesser suitability standard.
If everyone were aware of the differences between fiduciary versus suitable advice and if it were crystal clear when you were receiving which, I suppose one might argue that investors could proceed in an informed, “buyer beware” manner. The problem is, the nature of investors’ relationships with their financial advisor is often murky at best. (For more, see: Proposed DoL Rules: How They'll Impact Financial Advisors.)
Did you know, for example, there are several types of professionals who offer financial advice? There are insurance agents. There are stockbrokers and bankers. And then there are registered investment advisor firms like the Cogent Advisor, with investment advisor representatives. To further complicate things, there also are “dual-registered” professionals who change hats depending on the kind of advice they’re delivering.
Why Should You Care?
Remember this: Only registered investment advisors are required by law to adhere to the fiduciary standard for all of your investments - whether earmarked for retirement or any other purpose. Like doctors or attorneys, registered investment advisory firm advisors offer advice that’s in their clients’ bests interests.
Then there’s the suitability standard to which other, non-fiduciary professionals must adhere. Think car sales. A car dealer won’t sell you an entirely unsuitable product like, say, a fruit basket. But neither would you expect them to tell you if there are better cars out there for your distinct needs. Similarly, if you assume a broker’s, banker’s or agent’s financial advice is secondary to their primary roles and sources of compensation (i.e., executing trades and/or selling commission-generating products and services), it becomes clear why conflicting interests and incentives may taint the quality of the advice you’ll receive from them.
This likely explains why many insurance agents, brokers and their trade associations have been lobbying against the DOL fiduciary rule. It threatens the lifeblood of their business. If the rule is enacted as originally structured, it’s likely their current sources of compensation will need to be reconsidered and potentially sharply reduced or at least made transparent for all to see. (For more, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)
In the meantime, many consumer groups and registered investment advisor firms like The Cogent Advisor have been regularly advocating for fiduciary levels of investor care for all. To be honest, if everyone is ever held to a true fiduciary standard, it isn’t necessarily great for our business either. We’ll suddenly have a lot more competition that more closely resembles the way we’ve been operating all along.
But it’s the right thing to do. As the incomparable Vanguard founder and former CEO John Bogle expressed in his New York Times Op-Ed, Putting Clients Second:
“In the debate about the fiduciary rule, one basic fact has been largely ignored. Investment wealth is created by our public corporations and reflected in stock prices. Stock market returns are then allocated between the financial industry (Wall Street) and shareholders (Main Street). So when the consulting firm A. T. Kearney projected that the fiduciary rule would result in as much as $20 billion in lost revenue for the industry by 2020, it meant that net investment returns for investors would increase by $20 billion. By any definition, that’s a social good.”
After six years of prior study, the DOL still felt the need to propose an additional delay before completing implementation of its fiduciary rule. With the DOL fiduciary rule left to languish in “limbo land” and with non-retirement assets still operating under business-as-usual arrangements either way, the onus remains on you, the investor, to ensure your advisor is a fiduciary - in word and deed.
A shortcut to determining whether you are in a fiduciary relationship with your advisor is to lead with the following three questions:
- Are you an investment advisor representative for an independent registered investment advisor firm?
- Can you confirm you are not dually registered? (If they are, some of their advice must adhere to the fiduciary standard but some can be merely suitable.)
- Will you put these assurances in writing for me? (For more, see: What You Need to Know About the Fiduciary Standard.)