Department of Labor Fiduciary Rule
The Department of Labor released its highly anticipated fiduciary rule in April. This was after a comment period that, among other things, generated over 3,000 comment letters. Depending on one’s perspective, it was either watered down or a reasonable compromise. For advisors operating as Registered Investment Advisors (RIAs), it should largely be business as usual, with respect to business practices. That is, an RIA and its representatives should already be acting as fiduciaries by putting their clients’ best interests first. Complying with the law, however, will likely be another matter.
The definition of who falls under into the category of fiduciary is pretty broad. According to an article in the National Law Review, it, “includes investment recommendations to plan, participants, and IRA owners, as well as recommendations about distributions from plans and transfers and withdrawals of IRAs.” Again, this should be business as usual, and it falls under the category of always do the right thing.
Complying with the rule might be quite different than business as usual, as a Securities Industry and Financial Markets Association study estimates that first-year compliance costs will total $4.7 billion; over ten years, the costs are estimated to be between $10 – 31 billion, while IRA owners are expected to gain by $33 – 36 billion. The cynic in one can see why broker dealers and other firms engaged in intense lobbying efforts to thwart the most onerous parts of the rule—under the guise of protecting investors, of course.
Here are some highlights of the rule:
- For most of the requirements, they must be put in place by April 10, 2017. Previously, the implementation date had been set at January 1, 2017.
- Certain existing relationships are grandfathered, such that they don’t need to be unwound.
- The rule largely implements the Prudent Investor Rule, which was established in 1992. That rule said that an advisor—a “trustee” in the original document—had to exercise the “reasonable care, skill, and caution,” of a prudent investor. So the standard doesn’t depend on the advisor or the client, but on a prudent investor.
- Certain insurance products (e.g. variable annuities), which had previously fallen under state insurance standards, now fall under BICE, or Best Interest Contract Exemption…cue the eye rolling. In short, it’s a document provided to the investor by the advisor—maybe better called, in this case, a broker—that says the advisor and the institution will serve as fiduciaries, and that it will “disclose material conflicts of interest and represent that none of its statements are misleading.” (quoted from the National Law Review article.)
- The BICE needs to be delivered at the point of sale (yuck; bad word) instead of at the time of the first conversation, as was originally expected.
- No asset class, such as illiquid assets, is precluded by the rule.
While nothing like the Dodd-Frank bill or bills that have to be passed before we can know what they say, there will likely be further refinements of the requirements of the law. Nearly every day, someone is offering a new webinar or conference call about the subject. Also, efforts are under way in both parts of Congress to derail the rule, effort which are very likely to be vetoed in the White House, and whether the veto could be overridden is unknown.
We will continue to keep you apprised of developments. In the meantime, Google will provide you ample reading material. As always, with anything you read on the internet or in free quarterly newsletters, you should always consider the article in light of possible motivations of the author.
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