The final version of the Department of Labor’s new fiduciary proposal appeared on April 6. This new rule automatically elevates all financial professionals who work with retirement plans and accounts to the level of a fiduciary, which requires them to unconditionally put their clients’ best interests ahead of their own.

While this rule will have by far the largest impact on brokers and planners who work on commission, it will also affect registered investment advisors (RIAs) who currently adhere to the SEC definition of a fiduciary and charge flat or hourly fees for their services. Here's how. (For more, see: How Advisors Can Plan for Fiduciary Rule Changes.)

Fiduciary Definition

One of the key points that some critics focused on during the comment period of the DoL’s fiduciary rule was the fact that the DoL bill’s definition of fiduciary differs somewhat from the SEC’s. Michael Kossman, COO for Aspiriant, an RIA in Los Angeles, said, “We are going to have to have more specific operational and procedural rules around conversations with clients about their retirement accounts.”

For example, advisors who are asked by their clients to look at other plans or accounts that they have elsewhere may be required to stop at that point and lay out any possible fees that might be charged for this service that would come on top of what the client is already paying inside the plan. RIAs may also need to revise their procedures when it comes to laying out the services that they can provide to prospects when retirement plans or accounts are involved.

Additional documentation that discloses hidden fees, commissions or conflicts of interest will likely need to be furnished up front in the initial meeting with a client. These documents will also explicitly state that advisors are putting the client’s best interests ahead of their own. (For further reading, see:  How the Fiduciary Rule Will Change How Advisors Work.)

Pricing Impact

The DoL rule will most likely have a substantial impact on how many advisors price their services to their clients. Brokers and planners who are paid commissions will have to start disclosing the amount that they are paid to their clients, which may lead to a major disruption in certain sections of the financial industry such as the annuity market. But even RIAs who charge a flat fee—by the hour or a percentage of assets under management (AUM)—may need to rescale their pricing structure so that they are charging less for basic services like buy-and-hold strategies using index funds and more for more sophisticated services such as tax-loss harvesting and estate planning.

However, not all advisors who charge fees expect to have to make substantial changes in their business models. Some feel that things will continue as usual after an initial period of change and adjustment. Others think that their current pricing models are very reasonable and will not be materially affected by the DoL rule changes. But brokers and others who work on commission will have to follow the Best Interest Contract Exemption provision rules, and this may be quite burdensome for them. (For related reading, see: Meeting Your Fiduciary Responsibility.)

The Bottom Line

The real impact of the new DoL bill has yet to be felt in the retirement industry. It will affect all stripes of brokers and advisors to some degree, but those who work on commission will experience much more drastic changes that fee-based advisors. Advisors in the fee category will also be required to make some changes such as additional disclosures and conversations with their clients regarding what they charge. (For related reading, see: The Fiduciary Rule: Advisor and Client Impact.)

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