How the DOL fiduciary rule transforms retirement management

This past spring, the Department of Labor (DOL) released a rule to address conflicts of interest when it comes to retirement advice, which will have far-reaching effects on the fiduciary landscape.

“It’s been in the works for years, and it wasn’t a surprise when it came out. The only surprise was that it was watered down, because there was a level of panic that was setting in over the past year. A lot of models haven’t adjusted,” says Daniel J. Dingus, president and executive director of portfolio management at Fragasso Financial Advisors.

Previously, advisers and brokers managed individual investor’s retirement accounts under different standards. Brokers followed a “suitability” standard for retirement accounts; they were required to offer a suitable product, not the best product.

Under the new rule, all money managers will be mandated to abide by a higher “fiduciary” standard, which means putting clients’ best interests before their own profits at all times. This attempts to keep brokers from steering investors to products where the broker receives a higher commission.

All fees, even commissions, will have to be disclosed, and a contract that states the adviser is acting in the client’s best interest will have to be submitted.

The rule is slated to go into effect April 10, 2017. There was an attempt to stop it, but Dingus believes it will go forward as planned.

Smart Business spoke with Dingus about the DOL fiduciary rule and the impact it will have on investors.

Do investors know the difference between a broker and an adviser?

The distinction has never been clear to the general public, which doesn’t really know who is what. It’s typically not based on credentials — but by how you act. However, investors are starting to ask about this, and as the rule gets closer to implementation it may open eyes even further.

Right now this only impacts retirement accounts, not personal accounts. The DOL was determined to rule on retirement accounts first, but at some point this may apply to all accounts.

How do you expect the fiduciary landscape to change?

Every day there are more advisers than brokers, and that trend will continue, as brokers go the way of the horse and buggy.

Firms that have always promoted brokerage products will have to learn what it takes to be a fiduciary. There’s a learning curve because they’ve never adhered to the true spirit of that standard — and been held liable to it. If you offer illiquid, proprietary or commission-based products and believe you’re acting in the client’s best interests, you will be hard pressed to prove that to a judge.

With firms taking on more risk — and they are definitely nervous about the legal consequences — there’s likely to be industry consolidation. That won’t just be with the brokers themselves but also with the providers. For example, Mass Mutual acquired part of MetLife earlier this year.

The rule will probably drive fees down a little bit, now that there’s a focus on fees, which is good for everybody. Because the brokerage world is going to be marginalized, mutual funds that have a litany of share classes will likely keep the cheaper ones, versus the more expensive ones.

What should investors be doing differently going forward?

You’ll need to ask yourself if you want to continue in a brokerage relationship, now that you understand the differences. However, for a minority of investors, brokerage products still make sense because of what’s available.

If investors aren’t being taken care of once the rule goes into effect, attorneys will certainly step in and educate people.

Business owners who sponsor retirement plans through their company also need to understand how the fiduciary responsibility works with their plan design, because, like individual investors, they typically don’t understand the difference between a broker and an adviser. If their provider or broker won’t take on the fiduciary responsibility, the trustee or board of directors is solely responsible. This is particularly important in the nonprofit sector, where they often spend their time on the foundation and endowment, ignoring the 401(k) plan.

Insights Wealth Management is brought to you by Fragasso Financial Advisors