202 / 708
8
On April
4
, the Department of Labor published its
long-awaited fiduciary rule, officially called “Definition
of the Term ‘Fiduciary’; Conflict of Interest Rule—
Retirement Investment Advice.” It should be no surprise
that an agency that turns “fiduciary rule” into a
12
-
word title was similarly verbose when it detailed how
advisors should interact with their retirement clients:
Where you and I would have said “Act in your clients’
best interests,” the
DOL
generated a manifesto that,
with associated documents, explanations, and exemp-
tions, runs to more than
1
,
000
double-spaced pages.
So, the
DOL
will not win any awards for brevity.
But it does deserve some sort of prize for developing
a final rule that will advance investor interests
without imposing excessive costs on the financial-
services industry—which, of course, would have
passed on the costs to investors. With that in mind—
and despite some much-criticized concessions to
the financial-services industry versus the
DOL
’s May
2015
proposal—I believe that the final rule better
protects investor interests.
The Rule
So, what does the rule do anyway? Any attempt
to summarize such a complex rule will necessarily
fall short, but in essence, the rule imposes a best-
interest test on those who provide advice on retirement
accounts, including
IRA
s and
401
(k)s. An advisor
may still recommend that an investor roll over money
from a
401
(k) into an
IRA
, may collect a commission
on an
IRA
, or may even sell an investment product with
high fees. But, among other obligations—and there
are many—he or she will need to establish documen-
tation showing that a particular investment decision
was in the best interest of the client. Especially in
the
IRA
space, that is a big change for brokers, who
historically have needed to meet only a suitability—
not a best-interest—standard.
If they cannot document that they serve investors’
interests, broker/dealers,
401
(k) plan providers, and
other retirement advisors face potential private legal
actions, including possible class-action lawsuits.
(The
DOL
lacks the statutory authority to bring enforce-
ment actions against retirement advisors, but it can
require that they enter into contracts guaranteeing
retirement investors the right to sue their advisors
and plan providers.) In the
401
(k) space, where plan
sponsors have long had fiduciary obligations, similar
class-action lawsuits have likely pushed down fees
by giving sponsors an incentive to ensure that they
are offering the lowest-cost share class for which
investors are eligible.
The Final Fiduciary Rule
One should approach an evaluation of such a complex
and nuanced rule with a fair amount of humility.
As one knowledgeable
ERISA
attorney told me, many
of the things we think we know about the rule
right now will turn out not to be true. But with that
caveat in mind, here are two of the changes in the
final rule that, in my mind, better protect the interests
of investors. In short, the theme that runs through
these and other improvements to the rule is that they
ease the operational burden of the rule without
compromising investor protections.
First, for those investors who are currently in commis-
sion-based retirement accounts, there is an improved
grandfathering mechanism that should allow them to
maintain this relationship if it is in the clients’ best
interests. The original proposal would have made it very
difficult to maintain a commission-based relationship.
The
DOL
’s
2015
rule grandfathered existing commission
accounts only if the advisor did not provide additional
advice on them.
The original grandfathering provision would have pro-
duced several problems. First, it seems odd that
advisors could continue to collect trailing commissions
on assets on which they provided no advice. Second,
to the extent that an advisor did fail to provide advice
but continued to collect a fee, this arrangement
would arguably conflict with
FINRA
’s requirement that
an investment continue to be suitable for its owner.
Third, in my view, the original rule would have led to
Big Changes in Store for Brokers
and Their Clients
Morningstar Research
|
Scott Cooley