Everything You Need To Know About The DOL Fiduciary Rule
By: Mitchell Grant - July 22, 2019
The Department of Labor (DOL) fiduciary rule, was originally scheduled to be phased in from April 10, 2017, to January 1, 2018. As of June 21, 2018, The U.S. Fifth Circuit Court of Appeals officially vacated the rule, effectively killing it.
Breaking Down the Fiduciary Rule
The DOL’s definition of fiduciary demands that retirement advisors act in the best interests of their clients and put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest and states that all fees and commissions for retirement plans and retirement planning advice must be clearly disclosed in dollar form to clients.
- The Fiduciary Ruling was one of the most hotly debated topics in finance, with many brokers and investment firms doing all they could to halt it being enacted.
- The Fiduciary Ruling was brought into effect to protect the interests of clients versus the financial interests of their brokers and advisors. This led to lower commissions for brokers, less income from "churning" portfolios, and increased compliance costs.
- The DOL Fiduciary Rulings were vacated in 2018, but statements made by the DOL Secretary in May of 2019 stated the DOl was working with the SEC to reenact the controversial ruling.
- The individual investors most affected were those with fully managed IRAs and 401(k) accounts. These investors would have benefited the most from the Fiduciary Ruling.
History of the Fiduciary Rule
The financial industry was put on notice in 2015 that the landscape was going to change. A major overhaul was proposed by President Obama on February 23, 2015: "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."
Before finalizing the ruling, the DOL held four days of public hearings. While the final version was being hammered out, the legislation was known as the fiduciary standard. In January 2017 during the first session of Congress of the year, a bill was introduced by Rep. Joe Wilson (R, S.C.) to delay the actual start of the fiduciary rule for two years.
While the new rules were likely to have had at least some impact on all financial advisors, it was expected that those who work on commission, such as brokers and insurance agents, would be impacted the most.
178,000: The number of letters the DOL received that opposed a delay to enact the new Fiduciary rulings.
After the review by the OMB, the DOL publicly released an official 60-day delay to the fiduciary rule's applicability date. The 63-page announcement noted that "...it would be inappropriate to broadly delay the application of the fiduciary definition and Impartial Conduct Standards for an extended period in disregard of its previous findings of ongoing injury to retirement investors." Responses to the delay ranged from supportive to accusatory, with some groups calling the delay "politically motivated."
The Fiduciary Rule Under President Trump
The regulation was initially created under the Obama administration, but in February 2017, President Trump issued a memorandum that attempted to delay the rule's implementation by 180 days. This action included instructions for the DOL to carry out an “economic and legal analysis” of the rule's potential impact.
Fiduciary vs. Suitability
Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners, and insurance agents, who work with retirement plans and accounts. "Suitability" means that as long as an investment recommendation meets a client's defined need and objective, it is deemed appropriate.
Covered Retirement Plans Included:
- defined-contribution plans: four types of 401(k) plans, 403(b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans, and savings incentive match plans (simple IRA)
- defined-benefit plans: pension plans or those that promise a certain payment to the participant as defined by the plan document
- individual retirement accounts (IRAs)
What Wasn't Covered
- If a customer calls a financial advisor and requests a specific product or investment, that does not constitute financial advice.
- When financial advisors provide education to clients, such as general investment advice based on a person's age or income, it does not constitute financial advice.
- Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings.
Reaction to the Fiduciary Rule
There’s little doubt that the 40-year-old ERISA rules were overdue for a change, and many industry groups had already jumped onboard with the new plan, including the CFP Board, the Financial Planning Association (FPA), and the National Association of Personal Financial Advisors (NAPFA).
The June 2016 Chamber of Commerce Lawsuit
Three lawsuits have been filed against the rule. The one that has drawn the most attention was filed in June 2016 by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Roundtable in the U.S. District Court for the Northern District of Texas.
Who Did the Fiduciary Rule Affect?
The new DOL rules were expected to increase compliance costs, especially in the broker-dealer world. Fee-only advisors and Registered Investment Advisors(RIA) were expected to see increases in their compliance costs as well.
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