DOL’s Conflict of Interest RuleSubmitted by Karstens Investments on May 3rd, 2016
By Mark Johnson, AIFA®
On April 6, 2016, the Department of Labor (DOL) released the final version of the “Conflict of Interest Rule” on Retirement Investment Advice. Federal guidance on retirement investment advice has not changed in over 40 years since the enactment of the Employee Retirement Income Security Act (ERISA) back in 1974. This rule has a delayed effective date of April 10, 2017 to allow adequate time for affected financial service providers and the industry as a whole to adjust to changes outlined in the rule. Over the next year, you will hear much about the Conflict of Interest Rule or as some people call it the Fiduciary Rule.
The final rule defines a fiduciary advisor as someone that provides investment advice to a plan sponsor, plan participant or an IRA accountholder that results in a transaction and provides direct or indirect compensation to the Advisor. This is a broad and wide-ranging definition that will encompass all Advisors that offer advice for compensation in the retirement industry. This rule does not apply to businesses or individuals’ taxable or nonqualified investment accounts.
A fiduciary is the highest standard of care under the law and requires prudence, loyalty and to act solely in the best interest of the principal. For IRAs currently, an advisor only has to demonstrate a suitability standard concerning the management of the client’s IRA account and is not held to a fiduciary standard. This rule effectively moves the federal regulatory and compliance arm for IRA accounts to the DOL.
There are some exemptions provided in the rule that address variable fees and commissions, but these exemptions still require a best interest standard of care. The best interest standard of care requires a duty to loyalty, following the prudent man rule, full disclosure and reasonable fees. The Advisor must also acknowledge in writing that they are a fiduciary to the accountholder.
We welcome this new rule at Karstens for it has incorporated much of our fair dealing philosophy. We anticipate few changes in our processes from this new rule. The fight over a fiduciary standard in the financial industry has gone on for many years now against many competing interests and lobbyists. The fair dealing philosophy of level fees and the best interest standard of care has won the day. •