The Department of Labor (DOL) has proposed a set of rules that will require financial advisors who provide advice regarding retirement accounts to act in a fiduciary capacity towards their clients. This is a different standard than the suitability standard now used by many advisors and registered reps in the brokerage world. Being a fiduciary means that financial advisors will have to act in their clients' best interests regarding retirement accounts such as IRAs and 401(k)s. The suitability standard means that advisors only need to ensure that the financial product is suitable for the client’s situation, a much lower standard of care as suitability can be open to interpretation.

Even though these rules have not yet been put in place, we are already seeing some impact. Recently insurance giant MetLife Inc. (MET), parent of the Metropolitan Life Insurance Co., sold its network of about 4,000 insurance agents to Massachusetts Mutual Life Insurance, reportedly in part due to the potential impact of the pending DOL fiduciary standard. As you might imagine, the brokerage industry and those who earn some or all of their compensation from commissions are opposed to these new rules. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)

Both the Speaker of the House and financial guru Dave Ramsey oppose these new rules citing the potential impact on smaller investors with retirement accounts. While the actual impact on financial advisors and their clients is unknown at this point, let’s take a look at some possible implications.

Impact on Clients

The brokerage world and many politicians (who receive political contributions from the financial services industry) have raised fears that smaller investors will no longer be served as the costs of complying with these new rules will force some brokers out of the business and/or force them to raise fees for smaller accounts. Based upon the MetLife transaction there may be some truth to this. A reader of my financial blog wrote to me and indicated that a major brokerage firm had sent him a notice of a 65% increase in the fees for his wrap account. A friend relayed a story to me about an all-client meeting at the local office of his brokerage firm indicating that there would be an increase in fees due to the impending fiduciary rules.

Will these new rules come with increased compliance costs? I suspect the answer is yes. However, it just seems wrong that there needs to be a set of new rules to ensure that all financial advisors are acting in the best interests of their clients. Shouldn’t they have been doing this all along? (For more, see: What the ‘Fiduciary Rule’ Means for Investors.)

As to the concern that smaller clients seeking financial advice on their retirement accounts, and presumably other accounts, will now be underserved I find this a bit dubious. Fee-only organizations like NAPFA and The Garret Planning Network have many fee-only advisor members who specifically serve middle-class clients. In fact, The Garret organization’s original focus was on as-needed planning for this group of investors.

Robo-advisors, both pure robos and hybrid services like Vanguard’s Personal Advisor Service, present another low cost alternative to costly brokerage IRAs for individual investors.

Impact on Advisors

Financial advisors whose main source of compensation is commissions will be most impacted by these new rules. Beside the MetLife transaction, American International Group - better known as AIG (AIG) - sold off its brokerage unit as well earlier this year, in part citing concerns about these new rules. Financial advisors who work on a strictly commission basis may need to consider adding fee-based services, especially when it comes to their business involving IRAs.

While much of what has been written concerns the impact on brokers and registered reps, a recent article in Investment News discussed the potential impact on Registered Investment Advisors (RIAs), including those who work on a fee-only basis. The DOL fiduciary standard is along the same lines as those currently in place for financial advisors who work with 401(k) plans and other qualified retirement plans. The article points out that the fiduciary standard of care via the Securities and Exchange Commission (SEC) that RIAs currently must adhere to is different than the proposed DOL fiduciary rules. This means that advisors would need to adhere to two sets of rules. (For more, see: Proposed DoL Rules: How They'll Impact Financial Advisors.)

The key difference between the two sets of rules is the under the SEC version, financial advisors must disclose all conflicts of interest and under the ERISA version they are not allowed to have any conflicts of interest. Under the proposed new rules, commissions will cease to be an acceptable form of compensation when dealing with retirement accounts like IRAs. This will also put a crimp in the use of annuities in IRA accounts as well for those advisors used to selling them on a commissioned basis.

BICE Exemption. One carve-out exception included under the new rules is something called Best Interests Contract Exemption (BICE). According to a recent piece on Think Advisor: “The BICE essentially allows for conflicted forms of compensation (i.e., commissions and revenue sharing) as long as the compensation is “reasonable,” adequately disclosed and does not lead to biased recommendations in any way.” The BICE is a detailed, complicate disclosure document that must be completed for each client where commissions will be earned from the financial products recommended. It will include a disclosure detailing how much the advisor and their firm will make on each product recommended that includes the annual dollar cost to the client. (For more, see: What You Need to Know About the Fiduciary Standard.)

Rollover Conflicts. Recommending that a client rollover their 401(k) balance to an IRA account could represent a conflict of interest under the new rules that would impact fee-only financial advisors as well as those working on a commission or fee and commission basis. If the advisor’s fees for managing the IRA exceeded the client’s costs of investing in their old employer’s 401(k), this could be construed as a conflict of interest under the proposed rules and might require BICE disclosure. This could also apply to RIAs who offer several asset management options, such as third-party asset management programs (TAMPs), with varying fee structures.

The Bottom Line

The proposed DOL fiduciary standard is complicated and has potential implications for financial advisors and their clients. Investors may find themselves being hit with higher costs or being dropped by their commissioned financial advisor. Financial advisors will be subject to increased disclosure requirements that could fundamentally change the way they do business and the way in which they advise clients. (For more, see: How Likely is a New Fiduciary Rule in 2016?)