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A DOL Fiduciary Rule Delay: What Investors Should Know

Presidential Seal

  |  By Curtis Glovier

Is the Department of Labor’s (DOL) fiduciary rule facing a delay? That is the issue confronting the financial industry and retirement investors after President Donald Trump issued a presidential memo ordering that the DOL review the rule to determine whether or not the rule significantly alters the manner in which Americans can receive financial advice.

The DOL fiduciary rule, finalized last year, would require financial professionals who receive compensation for providing investment advice to clients with IRAs and 401(k)s to act in their clients' best interest. This is called a "fiduciary duty," and it is more rigorous than the current standard for many financial professionals who are only required to offer “suitable” advice.

This broader fiduciary definition is slated to go into effect on April 10, but Trump’s presidential memo means the fiduciary rule could potentially be delayed. Here are some important questions to consider if the rule goes into effect on April 10 and what it may mean for the industry and self-directed retirement investors:

What was the DOL fiduciary rule meant to accomplish?

In the Executive Summary of the Final Rule, the Department of Labor explained the reason for pursuing fiduciary reform.

“In 1975, the Department issued regulations that significantly narrowed the breadth of the statutory definition of fiduciary investment advice by creating a five-part test that must, in each instance, be satisfied before a person can be treated as a fiduciary adviser,” the DOL stated. “The Department created the five-part test in a very different context and investment advice marketplace. The 1975 regulation was adopted prior to the existence of participant-directed 401(k) plans, the widespread use of IRAs, and the now commonplace rollover of plan assets from ERISA-protected plans to IRAs. Today, as a result of the five-part test, many investment professionals, consultants, and advisers have no obligation to adhere to ERISA’s fiduciary standards or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments.”

What changes after April 10 if the rule goes into effect?

If the fiduciary rule proceeds as planned, the DOL says financial advisors who are paid to make recommendations about IRAs would be treated as fiduciaries and must protect clients from conflicts of interest. New protections in the DOL FAQ specify that financial advisors generally are required to:

Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty.

  • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
  • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
  • Charge no more than reasonable compensation; and
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest.
  • During the transition period, [April 10, 2017 through January 1, 2018] the financial institutions must also provide a notice to retirement investors that, among other things, acknowledges their fiduciary status and describes their material conflicts of interest.

What does Trump's memo on the DOL fiduciary rule require?

Trump’s memo directs the Department of Labor to review the rule to determine if it hurts Americans' ability to access certain retirement information and financial advice. The memo asks the DOL to prepare an economic and legal analysis of the potential impact of the rule that should address:

1. Whether the fiduciary rule is likely to hurt investors due to reduced access to certain retirement savings offerings, retirement product structures, retirement savings information or related financial advice.

2. Whether the fiduciary rule has resulted in disruptions within the retirement services industry that may harm investors or retirees.

3. Whether the rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

The direction in the President’s memo requires that if the DOL finds that any of the above have or will occur, the DOL must issue a proposed rule rescinding or revising the DOL fiduciary rule to address said findings.  Completing this could be an onerous task, resulting in a DOL fiduciary rule delay beyond April 10.

How has the financial services industry reacted to Trump's memo?

Numerous articles have said the industry is already moving toward a fiduciary standard—rule or no rule—and those changes are not likely to be rolled back.

As I discussed in a blog last year, the financial services industry has spent many hours over the past nine months preparing for the new rule. Some firms have made changes to products they will offer in IRAs. For instance, Edward Jones said in August that it would stop offering mutual funds and exchange-traded funds for clients who own commission-based IRAs.

It is highly unlikely that financial firms, ranging from Merrill Lynch to Wells Fargo Advisors, will stop in their fiduciary rule compliance efforts, according to the Wall Street Journal, because many of these firms have already enacted changes.

The point is reinforced by Barry Ritholtz, chief investment officer of Ritholtz Wealth Management. In an article titled, "It's too late for Trump to stop this financial rule," he argues that these changes are inevitable because they are being driven by the choices retirement investors are making for themselves. For instance, Ritholtz says investors are moving away from high-cost, conflicted advice and toward low-cost investment advice where advisors act transparently in a client’s best interests.

"Investors are not waiting for the government to make the finance industry put investors’ interests first. As market forces have revealed, they are insisting on it themselves," Ritholtz writes.

Where does this leave self-directed retirement investors?

As an owner of a self-directed IRA, you already act as your own fiduciary, ensuring the investments you make are in your own best interest. A DOL fiduciary rule delay should not change how you perform due diligence on potential investments or your ability to invest in alternative assets to fund your retirement.

But self-directed IRA owners still typically rely on financial advisors for answers about their account's performance. If the rule goes into effect advisors may decrease the amount of information they provide if it qualifies as advice and makes them subject to the fiduciary standard.

The rule also allows advisors to provide general retirement education without triggering the fiduciary standard, and advisors are still able to provide general information about all types of assets in retirement accounts, including alternative assets like private placements or non-traded REITs. (For more detail about the difference between education and advice you can check out the DOL’s FAQ which begins on page 5).  Self-directed IRA custodians, like PENSCO, will still be allowed to custody alternative assets in IRAs.

At PENSCO we will be paying close attention to any changes related to the DOL fiduciary rule so check back for future updates.

 

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.