What You Need to Know About the Fiduciary Rule and When It May or May Not Protect You

Provided by Angel McCall CFP®

Rules have been changed concerning investment professionals and retirement accounts. In the eyes of many, the change is good.

The “fiduciary rule” went into effect June 9th. This Department of Labor rule stipulates that any financial industry professional who makes investment recommendations to participants in qualified retirement plans in exchange for compensation will be considered a fiduciary.

What does all that mean?

It means that if you have an IRA, a 401(k), a 403(b), or any other type of qualified retirement plan account, any financial professional advising you must automatically assume a fiduciary duty. He or she must always act in your best interest.1

Why was this rule implemented? The DoL sees it as a way to limit the potential for conflicts of interest entering relationships between financial professionals and investors – particularly, conflicts of interest that could relate to a possible commission from an investment transaction.

Decades ago, financial services industry professionals were paid wholly or primarily through trading commissions or sales commissions. Today, things are different. Fee-based financial and retirement planning practices are now numerous. There are even some fee-only financial services businesses.

The whole industry has been shifting toward a new compensation model, in which financial services industry professionals earn some (or all) of their income from fees. The new DoL fiduciary rule may further promote this trend.

The new DoL fiduciary rule says that if you have money in an IRA or 401(k), and you want investment advice, investment evaluations, or investment management recommendations, one of the following two agreements must be in place by January 1, 2018:

*A written agreement to a fee-based advisory relationship with a financial professional.

*A Best Interest Contract (BIC), which states that you and the broker-dealer firm facilitating the buying and selling of securities held within your account have agreed to a commission-based fee structure related to such transactions. (Financial professionals who receive primarily commissions rather than fees commit to acting as a fiduciary for their clients through this contract.) The BIC directs you to a disclosure website where the costs of the advice offered and the potential conflicts of interest in the advisory relationship are noted.2,3

Many commission-based advisors are become Registered Investment Advisors that obligate them to act in your best fiduciary interests regarding these accounts.

Participants in 401(k)s, 403(b)s, and other types of employer-sponsored retirement plans will not be presented with contracts, but they will be made aware of disclosures that reference the potential for conflicts of interest.2

While many financial industry professionals already work by a suitability standard (which, it could be argued, approximates a fiduciary standard), the DoL is encouraging widespread adoption of the fiduciary standard with this new rule.

 Historically, investment professionals have been asked to uphold a “suitability standard” when making recommendations to their clients. Under the suitability standard, financial products are recommended considering a client’s age, income, net worth, and savings goals.

The Department of Labor disagrees. In its view, the suitability standard leaves an open door for conflicts of interest to affect client-advisor relationships. In theory many investments or products could be found “suitable” for an investor, and the one most recommended could be the one that results in the largest commission for the financial professional offering the advice.

The new fiduciary rule will not impact the value of your IRA or retirement plan account. It may impact the financial professional you have a relationship with, however. Your representative may already have a fee-based (or fee-only) compensation structure in place; he or she may inform you of a transition to a fee-based business model; or, he or she may tell you that commissions will still be part of his or her compensation.

The fiduciary rule has come to the forefront of the discussion about retirement planning and retirement saving. In the eyes of many, its adoption and implementation are a good thing.

When the Fiduciary Rule Will Not Protect You. 

  • The Fiduciary Rule applies ONLY to retirement accounts.

  • Other investment accounts or individual investments are not covered by the DoL rule.

  • Advisors only need to “inform” you if they make commissions.

Registered Investment Advisors  are “registered” and regulated by the Securities and Exchange Commission and/or state securities authorities. They let the consumer know that it charges fees (and may also charge commissions). This registration does not signify any advanced level of education or fiduciary duty regarding any personal financial planning.

How can know that your advisor is always acting in your best fiduciary interests?

A Certified Financial Planner™ has historically been held to the highest fiduciary standard in the financial services profession. When you contact a CFP®, you know that they have not only attained an advanced degree of knowledge in all areas of financial planning and investments, but they have taken a 6 hour exam with a pass rate hovering just above 50%.

In short, the financial services industry is not perfect, but with consumer awareness and government oversight, some, but not all, of the imperfections are being remedied.

Click Here to Download a PDF of this Article


1 - tinyurl.com/ybkb7hhc [5/23/17]

2 - dol.gov/ebsa/faqs/faq-conflict-of-interest.html [6/6/17]

3 - wealthmanagement.com/regulation-compliance/final-dol-fiduciary-rules-glance [4/6/16]

This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results.This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.