On April 6th, a new fiduciary rule was announced by the Department of Labor (DOL). This new standard in the retirement and investment world is also referred to as the “conflict of interest rule.” This rule has been in the works since its’ initial proposal a year ago and is set to take effect in part a year from now, with full implementation due in January 2018. This is an overview of this highly anticipated fiduciary rule and a discussion of its’ speculative impact.
According to online publication Inside Counsel, in an article written by Chris Thorsen on April 18th, 2016, called: “What Does the Department of Labor’s New Fiduciary Rule Mean?”
“The DOL’s final fiduciary rule and related exemptions are intended to protect investors by requiring all who provide retirement investment advice to retirement plans and IRAs to abide by a ‘Fiduciary’ standard – putting their clients’ best interest before their own profit.”
Advocacy groups are pleased with the new standard, according to an article called “DC Industry Generally Gives Fiduciary Rule a Thumbs-Up”, written by Hazel Bradford on April 18th, 2016 in an online publication called Pensions and Investments. The article states:
“Advocacy groups are mostly in favor of the new standard…”
The rule is intended to make retirement and investment advisors accountable with the law, concerning any conflict of interests, which may influence the advice they give investors. Basically, the rule makes advisors legally liable if they’re not providing advice which is in their clients best interest.
On April 5th, Secretary of Labor Thomas E. Perez explained that the rule is a:
“…fundamental principle of consumer protection…”
Yet, on the other hand, James A Klein, president of the American Benefits Council, said:
“…employers appreciate some changes made in the final rule but worry about the ‘potential chilling effect’ if employers cannot provide routine guidance through human resources staff and outside service providers.”
The Pensions and Investments article goes on to state:
“Firms providing investment advice to plans must acknowledge in writing they are acting as fiduciaries. Advisors can continue to receive common forms of compensation, as long as they put their clients’ best interest first and disclose conflicts.”
Financial advisors and institutions cannot set their own compensation structures, without a prohibited transaction exemption. This is supposed to put the investors best interest before the advisors’ profit, by not permitting payments that create a conflict of interest. The exemption is referred to as the Best Interest Contract Exemption (BICE). This exemption must be used by an advisor or firm, to receive any compensation considered prohibited by the rule.
The Inside Counsel article explains:
“In response to industry concerns, the final rule also described communications that would not be considered fiduciary investment advice and, therefor, fall outside of this regulatory regime. Examples of communications not covered by the rule include: general communications and commentary regarding investment products, such as financial newsletters; marketing materials; investment education; retirement education; and providing a menu of available investment alternatives from which a plan fiduciary could choose.”
The impact of this new rule from the DOL, which will be slowly implemented and enforced over the next couple years, is still vague and unknown by the industry.
According to the Inside Counsel article:
“…the final rule is both lengthy and complicated. All industry sectors and consumer groups are in the process of studying the details and analyzing the implications of the rule and its exemptions.”
While advocacy groups and government officials are confident this rule will be a positive change that financial firms and institutions can implement successfully, industry leaders are skeptical and unsure of its’ final impact on day-to-day business. The coming months and years will tell how this new fiduciary rule will impact both investors and financial advisors.
S.A.C. Investments is interested in these current changes being implemented by the DOL, and can help you understand how this fiduciary rule will affect your investment strategy.
We’re an independent investment management firm that already believes investors should have access to unbiased, professional advice provided through a client-first relationship. This means we already put our clients’ investments before any conflict of interest from profit. If interested in learning more, please contact us today.