As financial professionals anxiously anticipate the Department of Labor’s new fiduciary requirements, which President Joe Biden is expected to sign this spring, their attitudes vary greatly. Some look forward to the anticipated changes, while others foresee disaster and still others are somewhat indifferent.

“I am not as concerned about it impacting our advisory business since we already act as a fiduciary to our clients,” said Amber Kendrick, vice president and retirement plan consultant at Procyon Partners in Shelton Conn. “However, I do think it may impact the retirement plan industry.”

No one knows yet exactly what the final regulations will entail, but last October’s proposed draft version provides a pretty good idea. It’s expected to expand the scope of what qualifies as “fiduciary” advice, and will likely close what the DOL regards as regulatory gaps that currently allow certain financial professionals to offer guidance that may or may not necessarily be in my client’s best interest.

If signed into law, as expected, the proposal will update and expand who classifies as a fiduciary and redefine what counts as fiduciary advice. The Investment Advisers Act of 1940 requires registered investment advisors (RIAs) to act in the best interests of their clients under a “duty of care.” The Employee Retirement Income Security Act of 1974 (ERISA) holds retirement-plan administrators to what some consider an even more stringent fiduciary standard, requiring retirement advisors to meet a five-part test before they are held to that standard. That test says, in short, that the investment professional is rendering advice about the suitability of purchasing or selling an asset and providing such advice on a regular basis—so that the professional might be presumed to be acting in the client’s best interests.

But if the professional only makes a single recommendation, some critics charge, he or she is exempt from the fiduciary standard. The draft proposal would eliminate or tighten certain such exemptions.

The DOL has said the current web of definitions about what does and does not constitute fiduciary investment advice has too many loopholes, while the Biden administration said the proposal is also designed to eliminate "junk fees" that are prevalent in the retirement investment advice business.

This isn’t the first time the DOL has attempted to modify ERISA. A 2016 measure required financial professionals to enter into contracts that would allow clients to theoretically sue for inappropriate advice. But two years later, the U.S. Court of Appeals for the Fifth District struck that effort down, saying the DOL had gone too far and exceeded its authority. In 2019, the Securities Exchange Commission (SEC) enacted Regulation Best Interest to advance a standard of conduct for broker-dealers who recommend securities transactions outside of 401(k) plans.

The latest round of proposed changes was published in October 2023, with an open comment period that closed in January. A final version was approved by the Office of Management and Budget in early March, and it’s expected to be signed by Biden in the spring.

“Investors overwhelmingly want and expect all financial professionals to provide them with financial advice in their best interests,” said Leo Rydzewski, general counsel for the Washington, D.C.-based CFP Board, an industry group for certified financial planners that supports the legislation. But that’s not always the case right now, he said. “A strengthened standard [of] trust and confidence is necessary and appropriate,” he said.

Might Confuse Clients
Other experts, however, aren’t so sure the new ruling will accomplish its stated goals. “The DOL rule is well intentioned, but it may not have the effect it desires,” said Jason Branning, founder of Branning Wealth Management, a fee-only advisory firm in Jackson, Miss.

To him, one problem is that the proposal makes no distinction between committed, full-time fiduciaries, such as fee-only advisors, and stockbrokers or insurance agents who provide transaction-oriented advice but not necessarily other financial-planning guidance.

“This posture will likely confuse consumers,” he said, “and will require hybrid brokers to define which hat—broker or fiduciary—they are wearing when a piece of advice is rendered.”

Brian McNamara, associate general counsel at Edelman Financial Engines in Boston, said that his firm already acts as a fiduciary, putting clients’ interests first. “We’ve been able to do this over time based on our independence and the application of our underlying business model,” he said. “We do not foresee any relevant impact to [our] business.”

Howard Bard, vice president and principal deputy general counsel at the American Council of Life Insurers in Washington, D.C., said that existing regulations are more than sufficient. The proposed rule “completely ignores the best-interest and conflict-of-interest standards already imposed and enforced by the SEC and state regulators,” he said.

What’s more, he said, the proposal would “impose a fiduciary barrier” by forcing low- and middle-income retirement savers who seek advice to go to fee-only advisors instead of to less expensive brokers and sales reps. Thus, it could cut off access to many types of annuities, for example, that would guarantee retirement income, Bard contended.

A Boon For No-Load Annuities
Some say the new fiduciary rule could boost sales of no-load, zero-commission annuities, which they argue are inherently free of conflicts of interest and cheaper anyway.

“Having zero commissions eliminates conflicts of interest as pertains to product selection,” said David Lau, founder and CEO of DPL Financial Partners in Louisville, Ky., which specializes in low-cost annuities.

Broadly speaking, annuities come in two flavors that have differing degrees of oversight. Fixed annuities are considered insurance products and are primarily regulated by state insurance commissioners. Variable annuities, which invest in mutual-fund-like subaccounts, are overseen by state insurance commissioners and fall under the jurisdiction of the SEC, just like market securities.

The new rule would make both types of annuities fall within the same fiduciary guidelines, Lau said. “This is a good thing for consumers,” he said.

Far-Reaching Implications
To be sure, many advisors already institute solid fiduciary policies, not giving clients inappropriate or self-serving guidance. Nevertheless, the new standard could have far-reaching implications, industry experts say.

“All financial professionals who work with retirement savers are potentially impacted by this rule,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute in Washington, D.C.

For some advisors, though, that’s good news because, they say, the current standards are simply not sufficient.

“Requiring financial professionals to act as fiduciaries can only positively impact the financial advisory business,” said Dan Forbes of Forbes Financial Planning in East Greenwich, R.I. “There have been too many cases of financial malfeasance over the years, and investment products continue to get more and more complex. The financial advisory business is mature enough to have a uniform set of standards where all advisors commit to avoiding conflicts of interest.”

Moreover, he said, financial planning is moving away from a transaction business to a relationship business.

“While the history of financial services is based in sales, the future of the industry is financial planning,” agreed Charles Weeks Jr., founding partner of Barrister, an investment advisory practice in Philadelphia. “That must include strict rules of conduct.”

He acknowledged, however, that even the new rule won’t fix all the problems. “You can’t simply legislate good behavior, morals, and professionalism,” he said. “We also need the players in the industry themselves to step up.”

Andrew Evans, CEO of Rossby Financial in Melbourne, Fla., put it this way: “At one point barbers and surgeons were the same person. That split had to happen, and we as an industry are at that kind of evolutionary moment now.”