DOL rule FAQs
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"Already-existing software is the answer to efficiently and profitably managing all accounts, even those that advisers may consider too small to keep under the DOL fiduciary rule. The final rule, released last Wednesday, requires all advisers to provide conflict-free advice on client retirement accounts.
Advisers can analyze these portfolios in one swoop and rebalance them with a few clicks of a button. They also can implement a robo-adviser strategy for accounts they may otherwise want to orphan."
What is the Department of Labor's Fiduciary rule?
The Department of Labor has issued a rule that governs the role and obligations of firms and individuals providing retirement advice. The rule increases the level of advisor responsibility to clients, thereby potentially resulting in better advice to more people. Advice can no longer just be suitable. Rather, the advisor must follow the ERISA fiduciary standard, or leverage a client best-interest exemption that opens up contractual liability to the firm. The net effect of the rule will likely be that firms already following the fiduciary standard by providing financial advice will be mostly compliant, whereas firms focused on selling investment products on commission will have to adjust.
Is an SEC fiduciary and DOL fiduciary the same thing?
No. The SEC is a federal body that regulates Registered Investment Advisors and has its own fiduciary standard. FINRA (Financial Industry Regulatory Authority) is an industry body that is a self-regulatory organization and regulates broker/dealers and supports certain SEC functions. The DOL is a separate government organization, and is involved in the regulation of investments by focusing on the retirement of workers. While the SEC relies on the Investment Company Act of 1940, the DOL find authority in ERISA.
When does the fiduciary obligation trigger?
The rule looks not at the title of the advisor but whether the person is providing retirement investment advice, either for an ERISA plan or an IRA. Recommendations are defined broadly, and include investment policies, security selection, manager selection, account structuring, and money movement (rollovers). If you provide advice on an IRA within a context of a household proposal that includes multiple account types, you are subject to the regulation. Fiduciaries may be held personally liable for failure to act accordingly.
What exemptions are available for commision-based products, like annuities?
There are several carve-outs in the rule that may help broker/dealers and insurance companies continue working under their existing business model. The Best Interest Contract Exemption is the main vehicle by which firms can continue to sell financial products without being a fiduciary. To summarize a nuanced issue, the BICE is a contractual "out" that allows the industry to retain commissions and revenue-sharing compensation. The firm may contract directly with a client and disclose a set of conflicts under a "prudent person" standard. But watch out--breaching a contract can lead to contractual liability and class-action lawsuits.
When do advisors have implement the fiduciary rule?
Certain main provisions will take effect on April 10, 2017, followed by a transition period through January 1, 2018.
What else should I know about the rule?
See these excellent sources for more information: