The DOL Fiduciary Rule: What it Means to You


If you’re a regular consumer of the financial news media, you’ve no doubt heard much mention of the U.S. Department of Labor (“DOL”) Fiduciary Rule, also known as the “conflict of interest rule,” over the last several months. Finalized this past April, the rule was designed to make a wider group of advisors subject to the fiduciary standard under the Employee Retirement Income Security Act of 1974 (ERISA), with implementation of the rule set to begin on April 10, 2017. But what does it mean for an advisor to be a “fiduciary,” and how might the rule affect investors?

Very simply, an advisor who is acting in a fiduciary capacity is duty-bound to always act in his or her clients’ best interests, and to always put the clients’ interests above his or her own. Certain types of advisors known as “registered investment advisors,” already act as fiduciaries to their clients, and these professionals are duty-bound to make all financial planning and investment recommendations based on that standard.

Other advisors, commonly known as registered representatives of broker-dealers, do not hold themselves out as fiduciaries and they are held to a different standard known as “suitability.” Under a suitability standard, investment recommendations must be appropriate, or “suitable,” based upon the client’s needs, goals and time horizon, but there is no requirement that the recommendation must be what’s truly best from the client’s perspective.

For example, under a suitability standard, an advisor considering two like investment options is not required to offer his client the most cost efficient option as would be necessary in a fiduciary relationship. Instead, he could offer the higher cost product, and potentially receive greater compensation, without disclosing that fact to the client as long as the investment meets the client’s needs.

Enter the DOL Fiduciary Rule

Given a difference in the level of care that may be afforded the clients of fiduciary vs. non-fiduciary advisors, the DOL sought to broaden the definition of a fiduciary as it pertains to retirement account relationships. Under the rule, the majority of advisors to retirement accounts will now be legally required to take greater responsibility for those accounts, while applying the highest standards to those relationships.

Under the rule, advisors would be considered fiduciaries if, for compensation, they make recommendations to retirement investors with respect to:

• Advising on the acquiring, holding, disposing, or exchanging of securities or other investments;

• Designing an investment strategy, portfolio composition, or the recommendation of other persons to provide investment advice or investment management services;

• Advising on rollovers, transfers or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made, as well as how to invest rolled over, transferred or distributed amounts from a plan or IRA.

• Advising on the selection of investment account arrangements (brokerage versus advisory).

The Affect on Advisor Compensation

While retirement account advisors have historically enjoyed a fair amount of latitude in their business practices, the types of investments they offer, and in the way they could be compensated for their services, the DOL has now deemed certain traditional practices as “prohibited transactions” if they could potentially put clients’ and advisors’ interests at odds with one another.

For example, recommendations that result in advisor compensation that may vary based upon the investment product or share class suggested may now be considered prohibited unless an exemption is applicable. Such forms of prohibited compensation may include commissions, 12b-1 fees, or referral fees. In response to this prohibition of variable compensation, some investment firms have chosen to ban commission-based products in retirement accounts in their entirety, thereby encouraging their advisors to convert their retirement businesses to a fee-based model. Others, however, are choosing to continue the use of commission products by employing a Best Interest Contract Exemption (“BICE”).

The Best Interest Contract Exemption

While the DOL has identified certain practices as prohibited, the BICE may allow those practices to continue as long as the advisor: • Attempts to act in the best interests of the client • Discloses any and all potential conflicts of interest • Provides a record of the commissions or fees collected 1

Within the construct of the BICE, the “Full BIC” is required of an advisor who receives compensation in the form of commissions, 12b-1 fees or referral fees, while the “BIC Lite,” or “level fee exemption,” applies to advisors who assess fees based on a percentage of assets under management, or who charge a flat fee for services regardless of the investments recommended. While both versions of the BIC require client disclosures, a client contract is not typically required for a level fee exemption, but is required for users of the Full BIC. Similarly, disclosure requirements are considerably more stringent under the Full BIC. 2

What the Future May Hold

Although the DOL Fiduciary Rule is slated to go into effect this coming April, as of this writing, there are some questions that remain. First of all, the rule only requires that advisors act as fiduciaries with respect to their retirement account relationships; non-retirement accounts fall outside of the DOL’s purview, and as such, the requirement for a fiduciary level of care is absent in some of these relationships. Given this disparity, there has been speculation in the investment community that the Securities and Exchange Commission may, at some point, expand the application of the fiduciary standard to include non-retirement accounts as well, thereby ensuring that the same level of care is being provided to clients in both their retirement and non-retirement wealth management needs.

While only time will tell if we will see an expanded application of the rule in the future, perhaps more imminent is the future of the rule itself under the new Trump administration. While there has been no official decision as to whether the rule will be upheld, modified or repealed, the DOL has requested a delay in order to meet President Trump’s directive to review the rule.

As we collectively wait to see what the future holds for the rule, and how it may ultimately impact advisor and client relationships, please feel free to contact us if you have any questions, or require additional information.

Content written by Apella Capital, LLC. Apella Capital, LLC, is an investment adviser registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted. No current or prospective client should assume that future performance of any specific investment, investment strategy, product, or non-investment related content made reference to directly or indirectly in this article will be profitable. As with any investment strategy, there is a possibility of profitability as well as loss. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Apella Capital or your advisor. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Please be advised that Apella does not provide tax or legal advice and nothing stated or implied in this material should be inferred as providing such advice.

Real Time Web Analytics