Fiduciary Ruling Not Out Of The Woods Yet

Every one of you Cutter Family Finance readers should be familiar with the DOL’s fiduciary rule (the one requiring all financial advisors who provide investment advice to retirement accounts to act in their clients’ best interest). Several of these articles have explained what the rule means, what will change, how it will affect you, and—most relevant to today’s discussion—when it will start to affect you.

You may also remember seeing the rule mentioned in the news back in June, when portions of it went into effect. The imposition of this standard across all financial professionals was a significant change and made a lot of headlines.

Recently, the fiduciary rule has been in the headlines once again, except those headlines now include the word “delayed.” So now, many are left wondering where the rule stands. Is it in place, or is it delayed? How can it be delayed if it was already implemented? What does this mean for retirement accounts?

Initially, the Department of Labor’s fiduciary rule partially went into effect on June 9 of this year, with the directive that full implementation be completed by January 1 of 2018. The time between June 9 and January 1 was intended to be used as a transition period and it was widely noted that the rule would not be strictly enforced during this transition period. Now, the Office of Management and Budget (OMB) has officially approved an 18-month delay beyond January 1, 2018, on the enforcement of portions of the fiduciary rule. With that 18-month delay, full implementation is not required until July 1 of 2019.

Let me explain. The marquee feature of the rule—the requirement that financial advisers providing investment advice relative to retirement accounts act in the best interests of their clients—did go into effect on June 9. Another feature of the rule, that advisors are required to charge “reasonable compensation” and avoid misleading clients in regard to this compensation, is also currently in place and will not be affected by the delay. However, as mentioned above, the DOL rule initially provided something of a grace period to advisors, noting that as long as advisors are attempting to comply with these standards, they will not be subject to claims for violation of them until expiration of the original implementation date of January 1, 2018.

So, if those rules are already in place, what is the purpose of the delay? The reason given is focused on some of the more complicated features of the new rule. Specifically, the rule provides certain exemptions that are available under limited circumstances when specific procedures are followed. The delay is intended to ensure that there is proper time for the industry to adjust and become compliant with these features and procedures. (The delay in the effective date for those exemptions does not mean they are unavailable until the effective date. Rather, that advisors operating under one of those exemptions will not be required to follow the strict procedures required to be eligible to use one of those exemptions until the delayed effective date.)

According to thinkadvisor.com, the Department of Labor filed with the OMB to delay the applicability date on three of the rule’s exemptions, exemptions to which the Department of Labor has proposed amendments. The three exemptions at issue include: “The best-interest contract exemption, which opponents of the rule argued is the contract that would spark a slew of class-action lawsuits; Class exemption for principal transactions in certain assets between investment advice fiduciaries and employee benefit plans and IRAs; and Prohibited Transaction Exemption 84-24 for certain transactions involving insurance agents and brokers, pension consultants, insurance companies, and investment company principal underwriters.”

Of those three, the Best Interest Contract (BIC) exemption is garnering the most focus. The BIC exemption provides an exception to the rule that will allow broker-dealers to continue to work on commission, as long as the advisor acknowledges the overarching fiduciary duty. This means they must “disclose compensation and other fee information, to warrant that neither the adviser nor the financial institution will make misleading statements pertinent to the transaction,” and they must “supply the client with a list of steps the adviser and the institution will take to mitigate potential conflicts of interests.”

The BIC must be signed by all parties, including the client, the advisor, and every financial institution owning a product being offered. The big concern with this BIC exemption is that it makes the advisor and the institution incredibly vulnerable to lawsuits from clients. It’s especially interesting that the BIC exemption is causing much of the holdup, considering it was only put in place as a concession to those who want to keep working on commissions, yet those folks are the ones most concerned with its inclusion.

The fiduciary rule as a whole was already delayed this year because President Donald J. Trump requested that the DOL reconsider it as a whole. (The rule was initially supposed to go into effect in April, rather than June). Many people worry that this new delay will cause the DOL, now working under the Trump administration, to gut much of what is at the heart of the rule. Although it seems like a “no-brainer” to require professionals charged with protecting and securing their clients’ retirement portfolios to act in their clients’ best interests, apparently it isn’t obvious to those who are making the rules.

Folks, if you currently use a financial professional or are seeking one, make sure you know what standard they are held to. Ask them what licenses they currently have. You have every right to ask, regardless of what happens with the DOL fiduciary rule.

We will have to see where this delay leads us, but one thing remains true: you must be vigilant and stay alert with your financial future, because you deserve more.

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