New Rule Explicitly Makes Stockbrokers Fiduciaries When Dealing with Retirement Funds April 12, 2016

By Jay H. Salamon

You may have seen articles lately referring to “the DOL” and “Fiduciaries.” If you didn’t have time to read more than the headlines, you might wonder what these terms mean and what all the fuss is about. Well, wonder no more. We have answers for you.

The letters “DOL” stand for Department of Labor, the cabinet-level federal agency that’s responsible for the welfare of wage earners, job seekers, and retirees. Among other things, the DOL regulates employment benefits like pension plans and 401Ks.

A “fiduciary” is a party to a relationship in which he or she, in carrying out specified responsibilities, owes another person or entity (known as the “principal”) the highest duty of loyalty and care. Fiduciaries are required to act in their principal’s best interests, meaning they are not allowed to advance their own agendas at the principal’s expense.

Advisors, Brokers, Agents to Act as Fiduciaries for Retirement Plans

And the fuss? The fuss concerns something that may well be important to you if you or your family members are saving and investing for retirement. The DOL has finally released a long awaited rule change that will require stockbrokers, insurance agents, and other financial advisors to act as fiduciaries when they make investment recommendations to retirement plans; plan sponsors, participants, and beneficiaries; and IRAs and IRA owners.

What does it mean to say that financial advisors must act as fiduciaries? We like the explanation of The Committee for the Fiduciary Standard, a group of investment professionals and fiduciary experts who volunteer their time to advocate that all investment and financial advice be rendered as fiduciary advice.  The Committee lists five core principles of the fiduciary standard:

  • Put the client’s best interests first;
  • Act with prudence, that is, with the skill, care, diligence and good judgment of a professional;
  • Do not mislead clients; provide conspicuous, full, and fair disclosure of all important facts;
  • Avoid conflicts of interest; and
  • Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

Brokers Rarely Act Like Fiduciaries

Maybe you thought brokers already did those things. Well…surprise! While we’ve always contended that brokers are fiduciaries under state law with respect to all customers, the brokerage industry has long claimed that brokers are just order takers who don’t have to put their customers’ interests and well-being ahead of their own. In fact, a big part of “the fuss” created by the new DOL rule is that brokers rarely put a customer’s needs first and they hate the idea of having to act as fiduciaries. Why? Because their job primarily is to sell. One becomes a successful salesperson by persuading people to buy whatever products one has to sell, whether or not the products are any good.  Obviously, brokers don’t want to have to tell people that there are better, cheaper, safer alternatives to the expensive, risky garbage the brokers are peddling. For this reason, brokerage industry members have been fighting this rule change for years.

Their constant complaining has not been in vain. The industry managed to win a number of concessions from the DOL, one of which is that this new rule won’t take effect until April 2017 and won’t be fully implemented until January 2018. That means there’s plenty of time left for brokers to keep selling whatever high commission investments they think are “suitable” for the customer, even if other better and less expensive choices exist.

New Rules Doesn’t Impact Taxable Accounts

We should emphasize that this DOL rule will have no effect on how brokers are to treat taxable accounts and owners of those accounts. The rules and regulations governing how brokers handle ordinary non-retirement accounts are solely within the province of the Securities and Exchange Commission and the Financial Industry Regulatory Authority. The Dodd Frank Act, which President Obama signed into law in July 2010, gave the SEC authority to adopt a uniform fiduciary standard for all broker-dealers. After dithering for years, the SEC indicated late last year that its 2016 agenda might include codification of a proposed uniform fiduciary standard. But as of now, it’s business as usual for brokers handling taxable investment accounts.

To conclude, we want to emphasize that the new DOL rules are actually a lot more complicated than what we’ve described here. For instance, we haven’t discussed various exceptions, exemptions, and concessions that will tend to water down the effect of the changes. Moreover, there are ways the industry could circumvent the rules to some degree, the most basic being to overwhelm customers with such extensive written disclosure documents that the customers will sign without reading or understanding them. Nevertheless, the DOL rule revision marks a growing trend in which regulators actually seem serious about wanting to enhance protection for investors. That’s a good thing.

We’ll return to this topic and explain more as we get closer to April 2017.

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