There have been concerns raised by some professionals that the term “best interest” as used in the DOL rule is undefined and the industry should act to define what the term means before the courts do.
While I recognize that many practitioners, especially those from the insurance industry, would like to have detailed check lists regarding “best interest,” it is not true that the DOL has “done little in the way of defining best interest.” In fact, the DOL clearly stated:
Give advice that is in the retirement investor’s best Interest (i.e., prudent advice that is based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor, without regard to financial or other interests of the advisor, financial institution, or their affiliates, related entities or other parties).
And in an expanded definition:
Best interest means advice that, at the time of the recommendation reflects: the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and needs of the retirement investor, without regard to the financial or other interests of the advisor, financial institution or any affiliate, related entity or other party.
In fact the best interest standard is one of the three elements of the Impartial Conduct Standards (ICS) that require:
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Give advice that is in the retirement investor’s best interest
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Charge no more than reasonable compensation; and
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Make no misleading statements about investment transactions, compensation and conflicts of interest.
The disconnect between the desire of some practitioners to have a clear set of rules and the DOL’s definition of best interest is the difference between Suitability Rules Based regulation (e.g., Finra) and Fiduciary Principals Based regulation (RIAs). In discussing the BIC Exemption, the DOL makes it very clear that the Best Interest Standard (BIS) is principles based.
The exemption takes a principles-based approach that permits financial institutions and advisors to receive many forms of compensation that would otherwise be prohibited, including, inter alia, commissions, trailing commissions, sales loads, 12b-1 fees and revenue-sharing payments from investment providers or other third parties to advisors and financial institutions.
The exemption neither bans all conflicted compensation, nor permits financial institutions and advisors to act on their conflicts of interest to the detriment of the retirement investors they serve as fiduciaries. Instead, it holds financial institutions and their advisors responsible for adhering to fundamental standards of fiduciary conduct and fair dealing, while leaving them the flexibility and discretion necessary to determine how best to satisfy these basic standards in light of the unique attributes of their particular businesses. The exemption’s principles-based conditions, which are rooted in the law of trust and agency, have the breadth and flexibility necessary to apply to a large range of investment and compensation practices, while ensuring that advisors put the interests of retirement investors first.