DOL Installs New Rules for Advisors
On April 6, 2016, the U.S. Department of Labor (DOL) passed regulations that impose rather strict rules on any advisor who works with clients’ retirement accounts.
We, at FCVA, are very happy to see the imposition of a higher standard of advice for clients’ retirement monies. We will be more pleased when the stricter regulations apply to all financial and investment advice.
For now, the new regulations apply to any advice offered for use in retirement accounts such as IRAs, 403(b)s, SEPs, SIMPLEs, defined contribution or defined benefit plans; any kind of IRS designated retirement account. The regulations require that the advisor use the “fiduciary standard” when considering and recommending any investment used in a retirement plan.
Information from the DOL regarding official definitions of “fiduciary” and “conflict of interest” may be found by following the links below:
Conflict of Interest Fact Sheet: https://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html
Frequently Asked Questions about Conflict of Interest: https://www.dol.gov/ebsa/faqs/faq-conflict-of-interest.html
The DOL final decision re: “Fiduciary” and “Conflict of Interest”: https://www.federalregister.gov/articles/2016/04/08/2016-07924/definition-of-the-term-fiduciary-conflict-of-interest-rule-retirement-investment-advice
Briefly, a fiduciary is one who regards the client’s best interest to be paramount. The compensation paid to the advisor cannot be considered by the advisor when deciding whether or not to recommend a particular investment. The only questions allowed by the advisor to him/herself include, “Is this investment in my client’s best interest? Will it provide what my client needs when they need it? Is it the most financially efficient way to accomplish the goal? Is there something I can offer that may be better for my client?”
At no time can the advisor consider that two investments may be equally suitable for a client but one pays the advisor more, so that is the one recommended. Such is the “suitability rule” that has long been imposed on registered representatives of broker/dealers. It allows the variability of the advisor’s compensation to enter into the decision of what to recommend to a client.
The new regulations from the DOL specifically now require that registered representatives and non-registered insurance agents discard “suitability” and adhere to the fiduciary standard when advising on retirement accounts.
Only retirement accounts.
FCVA is a registered investment advisor (RIA) and as such has been required to adhere to the fiduciary standard for many years in all of our clients’ accounts – not only retirement accounts. RIAs have long been allowed to advise on corporate accounts such as 401(k)s because RIAs are by definition, fiduciaries. Registered Representatives have never been allowed to advise on ERISA retirement plans because of the obvious conflicts of interest. This new DOL rule requires that all advisors who advise on any type of retirement account now adhere to the fiduciary rule.
Hurray! The client wins!
At least the clients’ retirement accounts win.