New Fiduciary Rule Most Significant Change to Retirement Planning in Decades

New Fiduciary Rule Just Announced: How the Fiduciary Rule Works and How It Will Affect Independent Financial Advisors

Fiduciary RuleExtra! Extra! Hot off the press: six years in the making, after seemingly endless criticisms, concessions, and then ultimately a series of compromises, on Wednesday, April 6, 2016, the U.S. Department of Labor announced a new rule that will change the way the financial industry can give out retirement advice. This long-awaited rule is known as the “fiduciary rule”, or as it called in some circles: “the conflict of interest rule”[1]. This new fiduciary rule is monumental, with many calling it the most significant change to retirement planning in decades; after all, the Obama Administration is trying to set up the strongest consumer protections in American history, not only with the introduction of this new fiduciary rule but also with stronger, more pro-consumer rules regarding credit cards, student loans, and mortgages.

To read the full text of the Department of Labor’s proposed new fiduciary rule, click here to visit the Department’s official website (if you can’t read the full text of the proposed rule (after all, it is 208 long pages of dense, complicated content), we recommend you at least check out the Chart Illustrating Changes from Department of Labor’s 2015 Conflict of Interest Proposal to Final, FAQs, and the Newsroom’s Press Release/Fact Sheet.)

Given that the full text of the proposed rule is so complex, even for those well-versed in the financial advisory industry and regulatory affairs; we’ve broken down the rule into more easily digestible pieces so you can at least develop a cursory understanding of the proposed fiduciary rule and its implications. Keep in mind that these are just key points from the fiduciary rule and not a full summary of the entire rule.

 

What does the fiduciary rule mean?

There is already an existing rule known as the “fiduciary standard of care,” which legally requires financial advisors to act solely in the client’s best interest when offering personalized financial advice (this means putting the client’s best interests ahead of their own profits). However, up until the April 6, 2016 announcement of the new fiduciary rule, the only people who had to abide by this more stringent standard of care were financial professionals and firms registered as investment advisors with the Securities and Exchange Commission or individual states. Brokers, insurance agents, and most other financial professionals were held to a “suitability standard,” which requires less than the “fiduciary standard” and gives them more wiggle room. The more lenient suitability standard requires only a reasonable belief that any investment recommendation is suitable for the client (it is important to keep in mind that just because an investment recommendation is suitable for client does not mean it is the best option and in the best interests of the client).

 

Who is now considered a fiduciary under the new fiduciary rule?

The new fiduciary rule expands the definition of fiduciary, obligating more financial professionals to meet the fiduciary standard of care. As explained in a USA Today article on the topic, “Under the Labor Department’s definition, any person — be they a broker, registered investment adviser or insurance agent — paid to give advice to a plan sponsor (an employer with a retirement plan, for instance), plan participant or IRA owner is a now considered fiduciary. The new rule would also apply to advisers who help workers decide whether to roll over their money from an employer-sponsored retirement plan, such as a 401(k) or 403(b), to an IRA.”[2]

 

Are there any exemptions to the new fiduciary rule?

Yes. The new fiduciary rule included some exceptions as part of its regulatory package. As the text of the Department of Labor’s final rule reads, “The new exemptions adopted today are the Best Interest Contract Exemption and the Class Exemption for Principal Transactions in Certain Assets between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (the Principal Transactions Exemption).The Best Interest Contract Exemption is specifically designed to address the conflicts of interest associated with the wide variety of payments advisers receive in connection with retail transactions involving plans and IRAs. The Principal Transactions Exemption permits investment advice fiduciaries to sell or purchase certain debt securities and other investments out of their own inventories to or from plans and IRAs. These exemptions require, among other things, that investment advice fiduciaries adhere to certain Impartial Conduct Standards, which are fundamental obligations of fair dealing and fiduciary conduct, and include obligations to act in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.”[3]

The Best Interest Contract Exemption is available to advisory firms of all sizes, including independent financial advisors, providing a way for them to continue to receive many common forms of commission-based compensation while ensuring they act in the best interest of their clients.[4]

On the Department of Labor’s website, you can click here to read the full text of the Best Interest Contract Exemption and click here to read the full text of the Class Exemption for Principal Transactions.

 

When will this fiduciary rule take affect?

The expanded, broader definition of who constitutes a fiduciary under the new fiduciary rule will take effect on April 10, 2017. As for the Best Interest Contract Exemption and the Principal Transaction Exemption, the Department of Labor has “adopted a “phased” implementation approach for the Best Interest Contract Exemption and the Principal Transaction Exemption so that firms will have more time to come into full compliance. In particular, the full disclosure provisions, the policies and procedures requirements, and the contract requirement do not go into full effect until January 1, 2018.”[5]

As an independent financial advisor, you don’t have to go at it alone—when you pair up with Summit, you can rest assured that we are 100 percent dedicated to providing you with accurate and timely solutions to your business needs so you can focus on the needs of your clients. This includes helping your practice transition to the new requirements of the new fiduciary rule, making sure you are in full compliance with the rule by its compliance deadline. We encourage you to take a closer look at all that Summit has to offer and find the best fit for you and your practice. Let us show you why we have been voted the best boutique independent broker dealer firm in the country. For more information, visit http://www.joinsummit.com/ or contact us at (800) 354-5528.

 

Summit Brokerage Services is part of Cetera Financial Group

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[1] When Department of Labor Secretary Tom Perez announced the new fiduciary rule, he did so while standing in front of a backdrop that read “Protect Your Retirement, and Stop Conflicts of Interest.”

[2] http://www.usatoday.com/story/money/columnist/powell/2016/04/06/investors-new-fiduciary-rule-protection/82661384/

[3] https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-07924.pdf (See pp. 168)

[4] http://www.dol.gov/ebsa/faqs/faq-conflict-of-interest.html (See Part 21)

[5] http://www.dol.gov/ebsa/faqs/faq-conflict-of-interest.html (See Part 24)

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