A Fiduciary Advisor’s Perspective on the DOL’s Consumer Protection Proposal

A version of this post originally appeared on Employee Benefit News  

After years of discussion, the Department of Labor has finally proposed a new rule altering the long-standing “fiduciary standard”. Controversial and contested from its initial discussions in 2010, these new regulations have been framed as a way to help the middle class avoid excessive fees and poor advice from financial professionals who do not already serve as a fiduciaries. 

Under the current law, brokers or advisors, like AFS, can act as fiduciaries, which means serving the best interests of their clients. Alternatively, they could also act as non-fiduciaries, and therefore are not required or liable to steer clients towards the options that are truly best, and are instead able to recommend products where they may earn more compensation, as long as that product is “suitable” for their client. As a way to deter this practice, the new ruling states that financial professionals including, brokers, registered investment advisers, insurance agents, and others serving retirement accounts (401ks, 403bs, pensions, and IRAs), will have to act in the best interest of their clients, not only themselves. Labor Secretary Thomas Perez did make it a point that this widened fiduciary definition would also come along with a list of prohibited transaction “exemptions” so that newly minted fiduciaries would be able to still receive compensation through 12b-1 fees and commissions, as long as proper disclosures are made. Ultimately, this means financial professionals will not be able to accept any payments that could create conflicts of interest, such as fees earned for recommending certain financial products, without entering into an exemption contract.

As an exclusively “fiduciary” advisory firm, we believe that finally creating a fiduciary standard is long overdue. Giving financial advice to people is an important responsibility and should not be taken lightly, especially considering that most Americans need help getting on track to have enough money to retire with dignity. We are excited that the ruling will require more investment professionals to act under the appropriate umbrella of fiduciary liability. We have been advocating for our client’s best interest long before such a proposal existed, therefore, for our retirement plan clients – this proposal will have very little impact.

We are also deeply focused on creating better retirement plans for working Americans. This means proposing ways for the industry and marketplace to evolve and better meet the needs of investors. With that in mind, this current proposal has a few gray areas and minute details that give us pause and ultimately lead us to question whether the new ruling will truly help working Americans. Conversely, some of the additional components of the rule may actually have a negative impact when it comes to providing people with the financial guidance they need.

One specific example, in particular, is around 401(k) and 403(b) rollovers. Many retirement plan advisors who specialize in working with employer-sponsored plans also handle 401(k) rollovers on a regular basis. It makes sense if an employee has developed a longstanding and trusted relationship with their plan’s fiduciary advisor, wouldn’t they want to continue that relationship into retirement?

This new ruling could put a stop to an advisor’s ability to assist people by managing both their employer’s 401(k) and their individual 401(k) rollover account. Under the new proposal, it could be considered a prohibited transaction – even if the fiduciary advisor is advocating in the client’s best interest. If this is the case, it will require workers to seek out a new advisor or provider who actually wouldn’t have the same “prohibited transaction” restrictions and could steer them into a more expensive investment product. AFS 401(k) advisor, Daniel Haverkos states, “We wholeheartedly support the concept of this ruling and the requirement of a fiduciary standard, our concern centers around the potential that a retirement plan participant wouldn’t be able to work with their plan’s trusted fiduciary advisor into retirement, thereby taking the “choice” out of the hands of working Americans and placing it in the hands of a government regulator to say who someone can and cannot use for their financial planning needs.” Our firm believes that this and other provisions within the updated regulations may actually limit the scope of advisory practices by hindering their ability to give advice over the course of one’s entire life span as well as possibly reducing the advisory services that can be provided to small businesses and their retirement plans.

What are the next steps? The rule will undergo a 75-day comment period after which, the DOL will host a public hearing within 30 days of that comment period ending. After feedback is processed, there is a possibility that the proposed changes will be modified, but it is not clear when this process will be completed.

Let us reiterate that, as retirement advisors, we believe a fiduciary standard is right. We think the ideas behind the regulations are in the right place. However, we also believe in greater transparency; not even more barriers and compliance requirements for companies and advisors, which could prohibit working Americans from receiving the financial help and guidance that they want and need.