A new U.S. Department of Labor fiduciary rule will allow advisors to continue receiving compensation from third parties for the sale of investment and insurance products.
The DOL issued a revised fiduciary rule on Monday to harmonize its policies with the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).
The revised rule will allow financial advisors to receive many payments that would have been restricted or forbidden by the previous DOL rule, including commissions, 12b-1 fees, trailing commissions, sales loads, mark-ups and mark-downs, and revenue-sharing payments from investment providers or third parties, even within qualified plans and IRAs.
Like Reg BI, the DOL’s rule requires disclosures of conflicts of interest, but does not require advisors to avoid them altogether.
The rule creates an exemption for ERISA fiduciaries allowing them to conduct what were, for a time, defined as “prohibited transactions” involving third-party compensation as long as certain “impartial conduct standards” are met. ERISA forbids recommendations that involve any form of self-dealing - as long as advisors can demonstrate impartial conduct, the DOL will exempt them from those ERISA rules.
The DOL’s revised impartial conduct standard consists of three parts: A best-interest standard; a reasonable compensation standard; and a requirement to avoid making misleading statements on investment transactions.
Advisors will not be required to seek the lowest-cost investment options for their clients. In fact, the revised rule argues that choosing investment options on the basis of cost alone without considering other factors might violate its rulemaking.
Recommendations regarding retirement assets would now be subjected to the “five-part test” to determine whether the advisor is acting in a fiduciary capacity.
Based on rules established in 1975, the test holds that an advisor is a fiduciary if they render advice regarding the value of securities or make recommendations as to the advisability of purchasing or selling them; the advice is rendered on a regular basis; the advice is rendered pursuant to a mutual agreement with the end account owner; the advice is intended to serve as a primary basis for investment decisions with respect to plan or IRA assets; and the advice will be individualized based on the particular needs of the client. All five elements of the test must hold true for an advisor to be acting in a fiduciary capacity.
The proposed rule does not address potential conflicts of interest within digital advice platforms like roboadvisors, though some fiduciary advocates have argued that self-dealing within the digital realm is an issue that regulators should consider acting upon.
The revised rule also lifts much of the scrutiny around rollovers from workplace retirement plans to IRAs, but would abandon a DOL advisory opinion that rollovers from workplace plans fall outside of the realm of fiduciary advice. Advisors and plan recordkeepers can be held to a best-interest standard for any recommendations regarding rollovers, and will have to document why their recommendations were made in the clients best interest.
The proposed rule also clarifies that advice given to a retirement plan constitutes advice given to individual participants, and thus must fall into the fiduciary realm.Unlike the DOL’s previous fiduciary rulemaking, the revised rule does not create a private right of action between retirement investors and advisors, plan sponsors or recordkeepers.
Kenneth Bentsen, president and CEO of SIFMA, spoke out in support of the DOL’s rulemaking in comments released on Monday.
“We applaud the Department of Labor’s work to preserve investor choice, which allows for many different investment advice and education options consistent with the Securities and Exchange Commission’s new heightened standard Regulation Best Interest (Reg BI),” said Bentsen. “The standards of conduct under the proposed DOL exemption will be aligned with the standards required by Reg BI, offering compliance efficiencies. In addition, putting back in the Federal Register the five-part test that applies for fiduciary advice in light of the 2018 decision from the 5th U.S. Circuit Court of Appeals provides important clarification of the law.”