5 Ways The New DOL Rule Will Impact Retirement Advice

Note: this blog was updated on September 6, 2016.

When news of the U.S. Department of Labor’s new fiduciary rule broke, reactions throughout the financial services profession were mixed. Some financial advisors were instantly overwhelmed at the impending compliance implications. Others immediately began strategizing about how to remain successful with a likely influx of new competition, given that the DOL rule provides, according to Craig Lemoine, PhD, CFP®, a “business blueprint for anyone wishing to provide retirement advice.”

A simplified explanation of the new fiduciary rule is that it aims to protect Americans by requiring that any retirement advice given must be in the best interest of the client. The idea of acting in a client’s best interest is nothing new. The fiduciary rule as we know it is rooted in the 1940 Investment Advisers Act, which noted a “fiduciary obligation to clients.” The DOL’s goal in creating this new fiduciary rule is to ensure the best interests of investors are protected and serve as the foundation of financial or retirement advice they receive.  

While transitioning to the new fiduciary standard of care is already proving costly for some brokerage firms, individual advisors and existing fiduciaries, in no way is the sky falling. In fact, the DOL rule could turn out to be one of the best things to happen to the finance industry in a long time.

Jamie P. Hopkins, Esq., ChFC®, CLU®, RICP® and Associate Professor of the RICP® program at The American College of Financial Services, shares five ways the new fiduciary rule will impact retirement advice and give advisors an opportunity to showcase their commitment to better service and an overall higher standard of care:  

1. More transparent fees. The rule requires fees to be no more than reasonable. Additionally, if anyone operates under the Best Interest Contract Exemption (BICE), they will need to disclose fees to clients, as well as have a public-facing website that details their price and cost structure to comply with the new rule.
2. Higher standard of care. Many advisors will be required to operate under a higher standard of care than in the past. The best interest standard will now be mandatory for anyone providing advice to monies inside of an IRA or 401(k).
3. Focus on comprehensive planning. The new rule requires prudent advice in 401(k) rollover recommendations, investments, and any distributions from IRAs. This expanded focus puts extra emphasis on holistic, comprehensive retirement income planning.
4. Improved products. Certain investment products, mutual funds, and annuities will be under a much higher scrutiny thanks to the new rule. This increased scrutiny means that we could see significant changes to some financial products by way of simplification, lower fees and overall better performance for the consumer.
5. More competition in the marketplace. Expanding the fiduciary standard levels the playing field in some regards. It will lead to more advisors practicing comprehensive retirement planning and more advisors operating under the fiduciary model of giving advice. Increased healthy competition can be good to raise the overall performance level of every financial advisor.

Some of Professor Hopkins’ predictions have already begun to materialize as advisors prepare for the upcoming fiduciary rule compliance deadline in April 2017. According to Eaton Vance’s quarterly survey, Advisor Top-of-Mind Index (ATOMIX):

• 32 percent of financial advisors are in the process of changing and improving the products and services they offer.
• 73 percent of advisors said the fiduciary rule has already triggered more client conversations.
• 47 percent of client conversations are advisor-initiated while 26 percent are initiated by clients reacting to news about the new fiduciary rule.

While there are still some details to be hammered out in regards to enforcing the new rule and what exactly qualifies as “reasonable” compensation, many advisors appear optimistic about its role in protecting investors and raising the bar for the entire financial services industry.

If you are a broker-dealer, independent advisor, or other finance professional affected by the new DOL fiduciary rule and are interested in learning more, read The Changing Landscape of Professional Financial Services.