The Department of Labor unveiled its long-awaited fiduciary rule that requires advisors on retirement plans to put their clients' interests before their own.
Labor Department Secretary Thomas Perez said with the regulation, financial advisors should be able to make a good living giving advice.
While the labor secretary said the proposed rule would codify what most advisors are doing, White House National Economic Council Director Jeff Zients charged too many advisors currently have personal financial incentives that drain retirement savings through high fees and low returns.
He added the regulations will make it easier for good advisors to compete against bad advisors who have taken advantage of their clients.
The DOL said the rule will save American families at least $40 billion over 10 years, noting the sum could be much higher since conflicts of interest allowing advisors to profit unfairly at the expense of their clients are pervasive and well hidden.
Perez called the fiduciary proposal “a pillar of middle class security.”
Under the rules, anyone who is paid for giving advice to a particular retirement plan, plan participant or IRA owner would be obligated to put the client’s interest first for advice on what assets to buy or sell and whether to do a rollover from an employer-sponsored plan to an IRA. Currently, brokers who work with such clients need only provide "suitable" advice.
For the first time, plan sponsors and plan participants harmed by bad advice could sue fiduciaries subject to the Employee Retirement Income Security Act (Erisa). Currently, only the Labor Department can go to court against them.
The new rule contains a number of exemptions.
Sales pitches by advisors would be exempt, but only to large pension-plan fiduciaries with financial expertise.
Advisors would not be covered in recommending and selling to clients some fixed-income securities from their own inventories.
Brokers who fill orders for retail investors but do not give advice would not be covered by the standard.
The duty would also not be triggered by providing “general information,” such as the mix of stocks and bonds an investor should have based on his or her age, income and other circumstances.
Valuations and appraisals of employee stock ownership plans would also be exempted.
While not part of the proposal, the Labor Department is asking for advice itself whether advisors should be given an exemption from the fiduciary standard for recommending the lowest fee offerings in a particular class of investments.
Interestingly, the advice an advisor gives in a newsletter not specifically directed at clients would not be subjected to a fiduciary duty as with other forms of general communications, including television talk-show appearances and speeches at financial industry education conferences.
Whether or not a financial professional is considered a fiduciary under the rule would depend on the advice being given whether than the job title.
Attorneys, accountants, and actuaries would not be treated as fiduciaries for just providing professional assistance in connection with a particular investment transaction.
DOL estimates the fiduciary rule will cost firms an extra $348 million per year in added compliance costs including compliance reviews, insurance increases, supervisory changes, and policy and procedures and training updates.
Secretary Perez said the DOL will hold a public hearing on the fiduciary proposal roughly within 75 days to 105 days.
He wouldn’t estimate a final approval date. “The process is far from over,” said the secretary.
To read the rule and learn how to submit comments, click here. To read an impact analysis, click here.