What the DOL’s Fiduciary Rule Means for Financial Professionals Now

What the DOL’s Fiduciary Rule Means for Financial Professionals Now

The U.S. Labor Department’s so-called fiduciary rule has a long history, and it appears it’s not over. Proposed under the Obama administration, the rule would change the status of some financial professionals under the Employee Retirement Income Security Act (ERISA). It was originally supposed to be phased in in April but has been delayed until June, with a transition period for some exemptions extending through Jan. 1, 2018. In addition, the Trump administration may want to make more changes.

For financial professionals, it’s vital to stay up-to-date on the changes. “Good faith is not enough,” says Ronald Surz, president of PPCA. Here’s what financial advisers, especially those who work on commission, need to know.

It Establishes Broader Fiduciary Responsibility

Under the rule, all financial professionals who work with retirement plans, ESOPs, IRAs and so on, or who provide advice about retirement plans, will have to act in a fiduciary capacity. They’ll be required to act in the best interest of their client, and not their own interest. The rule also changes the way agents can be compensated.

When the rule goes into effect financial advisers and stock brokers will need to act as fiduciaries, says Adham Sbeih, CEO of Socotra Capital. “The greatest impact will be on commissioned salespeople, as it’s likely to create a conflict of interest such that brokers and agents working on a commission basis will be unable to meet the new standard,” he says.

It May Throttle the Volume of Transactions

Many of those affected, such as insurance and investment professionals, generally aren’t worried about being held to fiduciary standards of conduct, says Pete Swisher, senior vice president of national sales for Pentegra. “As a group, they do not fear ‘prudence’ and a ‘sole interest of the client’ standard of care. They fear only the nitpicky rules that the regulators tend to impose, compliance with which can be costly and difficult.” The new rule doesn’t recommend any penalties for not acting in a client’s best interests, leaving the likely remedy to be litigation.

In the bigger picture, the rule is likely to reduce the volume of transactions, Sbeih says. Commissioned salespeople won’t be able to receive compensation for pushing transactions. In addition, this will likely result in a higher standard of care for consumers who get information that is in their best interest, Sbeih says.

There May Be More Changes Coming

With the level of detail in the proposed rule change, it’s likely to face a prolonged approval. Swisher says the delay until June is likely “meaningless” and that longer delays are needed if the Trump administration is serious about reviewing and possibly changing the rule, which would require relatively rapid action from the Labor Department. “The consensus of industry observers seems to be that there will be a longer delay and that the rules will be edited to remove certain provisions viewed as onerous,” Swisher says, such as a requirement that clients have the right to participate in class-action lawsuits, instead of the longstanding arbitration provisions.

On the other hand, the administration may focus on health care and tax reform overrule clarifications such as this one. Without political pressure to make changes, the course of least resistance may be for the rules to go forward essentially as planned by the Obama administration, Swisher says.

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