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Labor Department Ruling Changes Retirement Advice Industry

James Joly, LPL Registered Principal Financial Consultant/Sr. Investment Analyst
James Joly, LPL Registered Principal
Financial Consultant/Sr. Investment Analyst

The fiduciary rule recently established by the US Department of Labor is changing the way the financial industry delivers retirement-savings advice, making that advice a lot easier to place your trust in.

The rule expands the definition of a fiduciary advisor under the Employee Retirement Income Security Act of 1974 (ERISA). It requires that financial advisors act in the best interest of their clients when providing investment guidance on retirement accounts.

While many advisors do act in their customers’ best interest, not everyone is legally obligated to do so and some do not.

While many advisors do act in their customers’ best interest, not everyone is legally obligated to do so and some do not.

Many investment professionals, consultants, brokers, insurance agents and other advisors operate within compensation structures that are misaligned with their clients’ interests and often there are strong incentives to steer clients into investment products that pay higher commissions. The Department’s conflict of interest rule and related exemptions are designed to protect investors by requiring all who provide retirement investment advice to plans, plan fiduciaries and IRAs to abide by a “fiduciary” standard – putting their clients’ best interests before their own profits.

To address their concerns about conflicts of interest and investor confusion, the DOL’s rule establishes a broad definition of fiduciary. The Department’s position is that all individuals who provide investment advice should be held to a fiduciary standard, which requires a shift from a suitability standard to a fiduciary standard for brokerage retirement business. Until now, a recommendation by a broker was only required to be “suitable,” which proponents of the new rule said encouraged some sellers to not have the best interest of clients in mind. That would mean brokerage business that pays differing levels of commissions and trails is soon not permissible in retirement accounts.

The DOL rule creates an exemption from the prohibition of differential compensation. To qualify for this exemption, an advisor must have a best interest contract (BIC) in place with retirement account clients, stating that they’ll act in their best interest.

Compliance with the new regulations will be required in April 2017, with a phased implementation of certain provisions, to Jan. 1, 2018.

Key Takeaways – Benefits to the investing public:

Better alignment of interests – Puts the advisor and client on the “same side of the table”. The advisors’ compensation grows only as the account value grows.

More flexibility – A fiduciary should be unbiased and product agnostic allowing for a wide array of investment options and greater portfolio customization.

Greater standard of care – The advisor must not only insure the recommendation is suitable but is also in the clients’ best interests. In turn, the advisor must pay close attention to the big picture.

Action Plan – What to do now:

Assess the type of account(s) that you’re currently investing in and the type of fee/commission structure you have. If your current retirement plan(s) are commission oriented and transactional in nature, you may want to consider a planning based relationship that is more holistic in nature.

Jim Joly is a LPL Registered Principal and Financial Consultant/Sr. Investment Analyst with Greenwich Bay Wealth Management in East Greenwich. This column is for informational purposes only and is not intended as ERISA, tax, legal or investment advice. You can reach Jim at [email protected] or or call 401.884.7707.

James Joly
Author: James Joly

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