The thought of the Department of Labor's new fiduciary rule has troubled the financial services profession for several years. For some, it could mean the end of a career, for others heavy fines and yet for others, costly restructuring. At the end of the day, it will mean a new way of doing business. So what is at the heart of the DOL rule? In layman’s terms, protecting the retirement savings of American workers is the focus of this new government intervention—protecting those savings from those of us in the profession who do not have the client’s best interest at heart. Being a fiduciary is serious business.

This article is not focused on the nuances of the rule, nor its validity. It is, however, focused on how to deliver the underlying message of the rule to your clients. (For more, see: What the DoL's Fiduciary Policy Means for Advisors.)

How to Explain the Fiduciary Rule

The financial services profession is broad, so stock brokers, insurance agents, attorneys, investment advisors, financial planners, etc.—the list goes on—have a vested interest in how the public perceives and receives the rule. The primary reason is because members of the public could be the ones bringing lawsuits against the profession years from now in the event that the advice that they received about their money or the products where their money is invested doesn’t pan out.

Regardless of how much your client knows about investing, simplicity is the key. On one side, there is the explanation of how the investment world works and on the other is the explanation of how the insurance world works. Keep in mind that the backdrop is exclusively retirement assets, i.e. defined contribution assets, Coverdell Savings Accounts, and IRA distributions, and the approach is simple.

For those of us who advise or trade in the investment arena, restrictions exist on how we advise on the plan structure (i.e. Safe Harbor provisions and qualified default investment alternatives) and plan maintenance (i.e. fund lineup), and how we work with the employees within their respective portfolios. If we, in our professional capacity, go as far as rolling a client out of a defined benefit or defined contribution plan into an IRA, the onus is on us to prove that it was in the client’s best interest. (For related reading, see: The Devil Is in the Details With New Advisor Rules.)

Here are two examples: 

  • Ms. Smith, as administrator of your company’s 401(k) plan, you have a fiduciary responsibility to make sure that the plan is appropriate for your employees. I share in that responsibility as I develop the plan structure and identify the funds that go in the plan.  As I work with your employees in allocating their portfolios within the fund selection of the plan, I am equally bound to advise them as best fits their needs, not mine.
  • Mr. Jones, now that you are retiring from company ABC, I can help you better manage your assets if you roll them into an IRA managed by my advisory firm. I can now help you with selecting from a much broader array of investments. In my fiduciary role, I will ensure that the portfolio best meets your long-term needs, not mine.

More Stringent Rules

Those of us who advise or trade in the insurance arena, restrictions exists on how we advise or select products for a client to rollover their assets from a defined benefit, defined contribution, or IRA. Anything bought with IRA distributions is subject to the rule; consequently, annuities (e.g. variable and equity indexed) and life insurance are on the watch list. Another example: 

  • Ms. Thomas, since you are no longer working at company ABC, I can help you put your money to work and provide some guaranteed income. I have products that will allow your money to grow in the market as you’ve experienced in the past, but in some cases, we can protect the growth and turn on income at any time that you are ready. Although I am paid commissions from the annuity companies, I am still a fiduciary and I am required to act in your best interest, not my own.

It is best to assume that the rule is here to stay and just like being proactive in contacting clients when there is market turmoil, we should be equally diligent about bringing our fiduciary responsibility to our client’s attention. (For related reading, see: The New Fiduciary Rule: Will Lawsuits Overturn It?)


By C.W. Copeland, Professor of Financial Services at The American College of Financial Services, a non-profit, accredited, degree-granting institution in Bryn Mawr, Pa.

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