My Comments: Last week I attempted a definition of the word FIDUCIARY. My goal was to somehow increase the chances that financial professionals who use the term “advisors” are in fact fiduciaries, and as such, bound by law, by tradition, by ethics, to act and behave in their clients best interests.
As a reminder, there are forces at work who we typically refer to as “Wall Street” who don’t want their salesmen and brokers to be held to a fiduciary standard, any more than your local car dealer salesmen and brokers are anything more than just salesmen and brokers. That’s not to say they are dishonest; they are not. But when there is a dispute, there is no accountability, as there is with a fiduciary.
This is another report on the saga those of us in the financial trenches face as we try to level the playing field.
By Paula Aven Gladych / March 26, 2014
The U.S. Department of Labor is scheduled to release its re-proposed fiduciary rules sometime this year or early next, so what should the industry expect in the latest rendition of the regulation?
The final rule, for starters, could include restrictions like preventing firms from paying their brokers or agents more for selling in-house products.
But according to Bradford Campbell at Drinker Biddle & Reath, the recrafted rule will most likely include exemptions for certain prohibited transactions.
The industry hopes DOL will exempt broker-dealers from having to change their business model, which reaches lower and middle-income investors who need advice but can’t afford a registered investment advisor.
If the DOL allows broker-dealers to continue doing what they’ve always done, despite their lack of fiduciary status, those in the industry who are opposed to the re-proposed rule may stop objecting to it.
Fiduciary status dictates how advisors set up their business. Fiduciary advisors usually are fee-based, whereas brokers tend to work on commission. Under the re-proposed fiduciary rules, brokers to IRAs would have to follow the same rules as registered investment advisors. Any advice they give to clients would be considered fiduciary advice.
The rules could cost millions in compliance and higher costs to investors, opponents say.
Another big issue is IRAs and rollover treatment, according to Campbell. If the DOL continues to apply the fiduciary standard to IRAs and restricts rollover solicitations, this could become the most controversial portion of the rule.
Opponents believe that restricting advice will damage the savings of low to middle-income people who can’t afford to pay for an RIA but can take advice from their broker-dealer. The problem with that scenario, according to the DOL, is that advice given by broker-dealers sometimes has monetary gain attached to it. The broker gets a commission if a client buys certain investments.
Under current law, investment advice is viewed as fiduciary investment advice only if it concerns valuation or buy/sell/hold recommendations and meets all five of these criteria, according to Drinker Biddle:
• Regularly provided (not just one-time advice);
• for a fee;
• individualized to plan;
• pursuant to a mutual understanding;
• that the advice will be a primary basis for plan decision-making.
A 2010 fiduciary rule proposal expanded the definition of fiduciary to include management recommendations, such as selecting an asset manager. Once implemented, it will require greater transparency and responsibility on the part of securities brokers who work with IRAs and 401(k) plans.
Other regulatory items that are on the 2014 agenda include the second round of fee disclosure rules, which propose that plan providers include a guide showing how plan sponsors can find all of the fees they are paying throughout plan documents.
Also expect the DOL to continue discussions about brokerage windows, lifetime income projections, annuity selection safe harbor and target date disclosure in upcoming months, Campbell said.