The New DOL Rule: Unanswered Questions
The DOL Conflict of Interest Rule is far from perfect. Some significant questions remain on the table: What is reasonable compensation? What will happen to smaller IRAs? Do today’s products clearly meet the fiduciary standard of care? Is this the death of General Agency systems? Are deferred annuity surrender periods in line with the Best Interest Contract Exemption?

These aspects of the new DOL rule do not have clear-cut answers. Their interpretation and clarification will likely take years of guidance, negotiation and litigation. However, even with some unknown outcomes the rule is unique in bringing a consistent fiduciary standard of care across the numerous lanes of the financial service profession.

The rule brings the financial service industry under one umbrella. For the first time a banker has the same duty as a broker, an insurance agent the same as an investment adviser. Moving forward, anyone providing transaction, asset or distribution advice to an IRA is required to act as a fiduciary and put the interest of the account holder above his or her own. After over 100 years of regulation, this rule is the first to compel financial services professionals to act on a level and even playing field.

The Conflict of Interest Rule and ensuing Best Interest Contract Exemption require those working with retirement accounts adhere to impartial conduct standards. These standards require, among other elements, that financial professionals working with retirement accounts provide prudent and objective financial planning advice in the best interest of their clients. Compensation must be reasonable and companies are charged with creating policies and procedures designed to prevent violations of these standards. 

Adhering to a Fiduciary Standard of Care
A consumer no longer has to discern which type of advisor they are working with and attempt to address conflicts of interests unique to specific business models. Under the new rule, any advice given to a plan, any advice regarding the acquisition or distribution of assets, transactions within an IRA account or advice regarding distributions from an IRA account is subject to a fiduciary standard of care. Any of the above elements subject to the duties of loyalty, prudence, obedience and communication. When advisors participate in exempted prohibited transactions (such as selling a product with a commission) consumers are still owed a fiduciary duty as well as specific disclosures and cost information. The rule encourages uniform and industry-wide transparency to consumers.

The financial service profession as well as the consumer will benefit from a uniform set of standards. The rule will foster innovation on new products and services encouraging new compensation models across the industry. The rule removes an emphasis on transactional business and places the emphasis on prudence and education. It places an emphasis squarely on retirement income planning and providing advice, rather than engaging in distinct transactions.

This rule will protect consumers. It will require financial professionals to maintain a fiduciary standard and treat their client with loyalty and obedience. Yes, it will bring challenges to financial services professionals, but it will create many new opportunities as well.  Behind us is a rough and travelled road. On the bright horizon ahead, lies a vast field of promise as far as the eye can see.  It is a time for financial service professionals to come together, to share, to teach and to learn with each other in new and exciting ways to better serve their clients.  Stay tuned. 

  1. http://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?article=2679&context=fss_papers
  2. https://www2.warwick.ac.uk/fac/soc/economics/staff/npostelvinay/natachapv_jmpaper.pdf
  3. http://www.nber.org/papers/w12717.pdf
  4. http://money.cnn.com/news/storysupplement/economy/recession_depression/
  5. http://demog.berkeley.edu/~andrew/1918/figure2.html
  6. https://www.stlouisfed.org/~/media/Files/PDFs/HFS/assets/Emmons-CFA-Retirement-Demographics-Mar-5-2015.pdf
    http://www.ebri.org/publications/benfaq/index.cfm?fa=retfaq4
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