DOL Fiduciary Rule

On April 6th, the U.S. Department of Labor (DOL) issued its final rule on the fiduciary standard for retirement accounts. The rule stipulates that brokers cannot give conflicted investment advice to consumers in 401k, IRA, or other qualified retirement plans. There is an exception that allows brokers to enter a Best Interests Contract agreement with customers to allow flexibility of services and products provided. This agreement stipulates that the broker will provide advice that is in the Best Interests of the client and opens the broker up to litigation, including class-action litigation, if the contract is not honored. Prior to the Best Interests Contract, brokers were able to force customers into arbitration agreements, keeping disputes out of the courts.

You might be asking yourself – Don’t brokers already have to look out for the best interests of their clients? The short answer, is no. The financial service community is broken into two (or three) types of regulatory regimes. Brokers, or registered representatives, operate under FINRA’s Suitability Rule. Brokers work for large and small broker dealer firms such as Bank of America’s Merrill Lynch, Morgan Stanley, Wells Fargo, and LPL Financial to name a few. Financial advisers, employed by Registered Investment Advisory firms, are held to a fiduciary standard. Insurance agents adhere to yet another set of rules, but many are also registered representatives who follow the suitability rule. The suitability rule is a lower bar than the fiduciary standard, allowing brokers to put their firm’s interest ahead of clients in many cases.

In 2010, the Department of Labor first proposed a change to the standard of care for retirement accounts by updating the Employee Retirement Income Security Act (ERISA) of 1974. The financial service industry and its powerful lobby fiercely opposed the rule, and it was subsequently withdrawn. The DOL released a new version of the rule in early 2015, this time with the full support of President Obama. In a report from early 2015, the DOL estimated that conflicted (non fiduciary) advice in the financial service industry costs investors $17 Billion each year. Make no mistake; this rule aims to redirect that $17 Billion from financial service companies to investors. The financial service industry spent huge dollars on lobbying efforts to defeat this rule. After a lengthy period of public comment and review, the DOL released it final rule in early April. The law will take effect in early 2018.

In the final rule, the DOL made many concessions and exceptions to allow the financial service industry flexibility in implementing the fiduciary standard. Some view these concessions as a watering down of the definition of a fiduciary. However, by leaving brokers, and more importantly their employers, open to litigation for infractions, the rule may have accomplished its goal without dictating how the industry does business. [1]

Republicans are quick to challenge the rule, claiming that more regulation is bad for business. House Speaker Paul Ryan is very vocal in his opposition to the ruling, and the House passed a bill aimed at killing the rule last week. President Obama vows to veto any legislative attempts to repeal the rule. We take a nonpartisan view that requiring financial advisors to look out for the best interests of their clients’ retirement money is good policy. We are now in limbo, with a split regulation of retirement versus non-retirement investment accounts. The SEC must act to bring all investments under the same standards. Regulatory changes take time to develop and produce results. We expect a gradual, but positive, shift in the financial services industry towards more client centric products and advice.

You may be asking how this rule affects ThirtyNorth Investments, LLC. While there may be minor changes to our compliance codes and contracts, we expect no major new requirements on our firm. We are a Registered Investment Advisory firm, already held to a fiduciary standard under the Investment Advisers Act of 1940. While the DOL ruling may take away one of our perceived competitive advantages, we support the adoption of the fiduciary standard for all professionals giving advice to the investing public. We hope these changes will strengthen the integrity and professionalism of the entire industry and build better trust with investors in the future.

[1] Kitces, Michael; “Advisor’s Guide to DOL Fiduciary and the New Best Interests Contract (BIC) Requirement,” April 11, 2016, https://www.kitces.com/blog/best-interests-contract-exemption-bice-and-dol-fiduciary-bic-requirements/