The impact of the DOL’s fiduciary
rule on financial professionals
The Department of Labor
(DOL) has unveiled its
final rule expanding the
definition of a fiduciary.
The new rule will have
a wide-ranging impact
on retirement accounts, particularly plans
with less than $50 million in assets as well
as the financial professionals that serve these
small-market plans.
Based on our analysis of the final rule,
Vanguard has identified several questions
small plans and their advisors should address
as they transition to the new rule. These
questions include the following.
What does it mean to be a fiduciary?
Under ERISA, fiduciaries must act solely in the interests
of participants and beneficiaries. And they must act with
the care, skill, prudence, and diligence under prevailing
circumstances that a prudent expert would use. This
standard is similar to fiduciary obligations under
securities law and trust law.
The key difference under ERISA is that fiduciary status
triggers an additional set of rules called prohibited
transactions. These rules completely ban listed conflicts
of interest—even if an action is in the best interest of a
client—unless you satisfy the conditions of a prohibited
transaction exemption.
How does the definition of a fiduciary change
under the new rule?
The expanded definition makes it likely you’d be
considered a fiduciary if you’re providing recommendations
about investments in a retirement plan or IRA or
distributions from such retirement accounts.
The rule expands the kinds of conversations that can lead
to fiduciary status and makes more financial professionals
fiduciaries when they’re serving retirement accounts.
How is the term ‘recommendation’ defined
under the new rule?
The definition of a “recommendation” is fairly broad
under the new rule. It’s defined as a communication
where, based on its context, content, and presentation,
would reasonably be viewed as a suggestion that
someone take action or not take action. And the more
personalized those communications or suggestions, the
more likely they’ll be considered a recommendation.
What do financial professionals need
to do differently?
The new rule raises the bar for financial advisors
providing advice to retirement plans or about
IRAs. Advisors are going to need to justify their
recommendations very clearly in terms of how
they can mitigate and manage potential conflicts
of interest while providing advice. They also need
to document their recommendations and make sure
these recommendations are prudent, meaning they’re
well researched and in their clients’ best interest.
As a result, client investment objectives and time
horizons as well as the costs of investments must
be taken into consideration.
How could this impact compensation
for financial professionals?
There is a broad view of the definition of compensation,
so advisors also are going to have to be clear in terms
of how they’re being compensated for their services
and how they’re going to mitigate any potential conflicts
of interest.
For example, some advisors who are paid on a level-fee
basis may be less affected, but Vanguard would caution
against thinking that they’re unaffected. The DOL views
asset gathering as a potential conflict of interest, where
someone is paid an asset-based fee, because the more
assets you have under management, the more you
might get paid. And so a rollover conversation in that
context could lead to a conflict that requires compliance
with a prohibited transaction exemption.
What is the impact on small plans?
The DOL was particularly concerned about protecting
small plan sponsors, and in many respects, the final rule
treats plans with less than $50 million as if they were
individual investors.
If a provider or advisor wants to avoid fiduciary status with
a plan sponsor under $50 million, they have to limit their
investment communications to purely educational material.
What opportunities are there under the final rule
for financial professionals?
Vanguard encourages financial professionals to
always put the interests of their clients first. Financial
professionals also should use this opportunity to
confidently talk about their value propositions. No matter
what fee structure they’re under or what obligations
they have, financial professionals must have their clients’
best interest at heart and provide a great deal of value.
The new rule also may present more opportunities
for financial professionals to advise small-market plans
if they are willing to accept fiduciary status. Providers
who are serving small-market plans but want to avoid
fiduciary status may find it easier to deal directly with
a financial professional who can serve as the fiduciary
for the plan.
There also may be more opportunities for advisors
to transition their businesses to a fee-only model
because of the final rule’s more stringent requirements
for commission-based services. But not every client
will be moved to a fee-based account as it may not
be appropriate, particularly for low-balance,
low-activity clients.
Transitioning to the new rules
The rule’s requirements will not begin to take effect until April 2017 and the new prohibited
transaction exemptions will be phased in between April 2017 and January 1, 2018. Vanguard
advises that financial professionals use this time to transition to the new environment.
For more information about the new rule and its impact on small plans, please contact
us at [email protected] or 800-684-401K.
P.O. Box 2900
Valley Forge, PA 19482-2900
All investing is subject to risk, including the possible loss of the money you invest.
This information is intended for educational purposes only and does not take into consideration your personal
circumstances or other factors that may be important in making investment decisions.
© 2016 The Vanguard Group, Inc.
All rights reserved.
For institutional use only. Not for distribution to retail investors.
DOLFPG 082016