What will the Department of Labor’s final fiduciary rule mean to CFP professionals and the way they handle rollover retirement advice? To find out, we asked Leo Rydzewski, CFP Board’s general counsel, who on Tuesday is meeting with officials from the Office of Management and Budget (OMB).

The proposed rule, which OMB has been reviewing since March 9, seeks to significantly expand who is considered a fiduciary and will for the first time apply the standard to brokers and insurance agents, as well as one-time advice and fixed annuity recommendations. The proposed rule is expected to be cleared by OMB and finalized by the DOL by mid-April, with a Jan.1 effective date, ERISA attorneys said.

Financial Advisor: When do you expect to meet with OMB staff?

Leo Rydzewski: We are meeting with OMB Tuesday and I am looking forward to that meeting. Of course, we don’t know what is in the final proposed rule, but we will be talking with the OMB about the final elements of the proposal that we believe are important.

Financial Advisor: What are you asking OMB to change or revise?

Rydzewski: In our comment letter, we asked the department to consider a few changes. But we’re in favor of the department publishing the proposal as a final rule even if there are no changes from the original proposal. We are asking the department to clarify the term "recommendation" as the department has used it, so it is consistent with the way that term is used in regulation from the SEC [Securities and Exchange Commission] and Finra. We also looked at this from the perspective of some smaller firms and thought it would be appropriate for the Department of Labor to create some type of exemption that makes a limited number of covered recommendations exempt from the annual review and reporting requirement, so long as other conditions are in place. But again, we would support the rule even if that change was not made. One other recommendation we offered was that the department just confirm that if a firm is offering robo advice or some other similar kinds of advice, that the firm would be a fiduciary under the rule. Again, these points are implicit, but we hope the department will make them explicit.

Financial Advisor: Will the final DOL rule mesh with the CFP Board’s own standards? Are there any key differences CFP practitioners should be aware of?

Rydzewski: From our perspective, financial advisors who are already meeting a fiduciary standard should have little difficulty meeting the DOL fiduciary proposal. There likely will be some one-time costs for developing compliance policies and procedures and maybe some additional disclosures, as well as the annual retrospective review that firms need to conduct and prepare for and provide to DOL upon request, but for those who are already meeting fiduciary standards, depending on the final rule, those costs should be minimal and born by the firm.

Financial Advisor: Are you concerned that the rule will limit access to professional financial planning and advice, as the brokerage and insurance industries contend?

Rydzewski: No, we’re not. A consumer who loses access to a financial professional who is merely engaged in an arm’s length commercial sales transaction cannot be deemed to have lost access to investment advice. In other words, limiting access to sales recommendations that are not in the retirement investors best interest is a good outcome, particularly for less wealthy retirement savers because they have a lot to lose with retirement recommendations that are not in the investor’s best interest. On the other hand, the department requiring financial professionals to provide retirement sales recommendations under a fiduciary standard will result in millions of Americans gaining access to retirement investment advice that is in their best interest.

Financial Advisor: The brokerage and annuities industries are vehemently arguing that the proposed DOL rule will require advisors to limit who they work with, concentrate on wealthier clients and increase their asset minimums to cover the cost of additional regulation. They contend this would hurt moderate-income investors. Have you seen any indication of this trend among CFPs?

Rydzewski: We surveyed CFP professionals after the SEC adopted Regulation Best Interest and found four years later that the vast majority, 82%, did not raise their minimum investable asset threshold for clients after the rule was adopted. Our own CFP fiduciary rule was expanded in 2020 and, according to our survey, 42% of professionals still do not require their clients to have a minimum amount of investable assets, while 86% of CFP professionals maintained their client roster. So, the way we see it here is that moderate income Americans can and will receive the same access to best interest financial advice as wealthy Americans. It’s also important to remember that this is what clients expect and deserve. We conducted a separate survey and found that nearly 97% of Americans agree that financial professionals providing one-time recommendations on retirement assets should be required to follow a fiduciary standard. This is important and is a leading change in the DOL proposal.

Financial Advisor: In recent Congressional testimony, former CFP Board Chair Kamila Elliott said that about 90% of CFP professionals can accept commissions and are not curtailed from doing so by Reg BI or the CFP Board’s own fiduciary standard and will not be hamstrung by the DOL proposal either. Do you agree?

Rydzewski: It’s a real misnomer when someone suggests that the DOL proposed rule will prohibit commissions, because that’s just not the case. Neither the CFP Board’s standards nor the proposed DOL rule prohibits advisors from earning commissions. A significant percentage of CFP professionals do earn some type of commission from the work they’re doing. Someone can act as a fiduciary and get paid in different ways. It’s not the method of compensation that dictates whether or not you can act in your client’s best interest, it’s the service you provide that does that.

Financial Advisor: You've taken a strong stand on annuities. How will the rule help beneficiaries and investors when a professional recommends fixed annuities?

Rydzewski: The stance that the CFP board has taken on annuities is no different than the stance we’ve taken on any financial product. The proposed rule doesn’t prohibit an advisor from making a recommendation or earning reasonable compensation, but it must be made in the client’s best interests. Many retirement investors turn to financial professionals who recommend a fixed annuity. Because those recommendations typically occur on a one-time basis, they don’t meet the current regulatory definition of fiduciary investment advice. That means the investment professional can steer the retirement investor toward the annuity that pays the maximum compensation, instead of to the annuity that is the best fit for the investor. Simply put, there should be one standard for best interest advice on retirement savings.

Financial Advisor: If you listen to brokerage, annuities and insurance industry lobbyists, they argue that the NAIC and SEC rules already impose a best interest standard, which makes the proposed DOL rule duplicative. Do you agree or think there are holes in current regulation?

Rydzewski: There are significant holes because those existing regulations, including the SEC’s Reg BI and the NAIC model rules, fail to cover significant categories of retirement investment recommendations. For instance, neither apply to real estate, many insurance products, commodities, CDs, other bank products, cryptocurrencies or recommendations to employers who have 401K plans. The proposed rule would apply to each of those categories of retirement investment advice. The NAIC model regulation, which by now most states have adopted, lacks robust consumer protections. We put out a guide that compares CFP Board standards of conduct to the NAIC’s model regulation and the most significant takeaway is that the NAIC model claims that cash and noncash compensation is not a material conflict of interest. That’s just not the case. Conflicts tied to cash and noncash compensation are among the most prevalent and impactful conflicts of interest. There's an enormous gap that the DOL's retirement securities rule will fill.

Financial Advisor: There has been extensive saber-rattling from industry groups about their intention to sue to vacate the rule—as they did successfully with the Obama-era fiduciary rule. Does that concern you?

Rydzewski: The department carefully evaluated the decision from the 5th Circuit that struck down the fiduciary rule by a two-to-one vote and carefully calibrated the proposed retirement security rule to address those concerns. So, we feel confident that when the department moves forward with finalizing the proposed rule, it will have addressed the concerns that the 5th Circuit decision has raised.