Imagine your estate plan is created and ready to go. You are protecting your home,…
The U.S. Department of Labor (DOL) released its final fiduciary rule on April 6, greatly expanding the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (ERISA), and creating new fiduciary standards for financial advisors regarding retirement investments.
This new rule is very significant for everyone with a retirement savings plan, such as a 401(k) and Individual Retirement Account (IRA) because it will increase the legal responsibility investment advisors have to their clients.
The final DOL rule, which goes into effect April 10, 2017, expands the definition of investment advice, among other things. The new definition of investment advice expands the fiduciary standard to include retirement investment services that have previously been held to the less restrictive suitability standard.
The new rule requires that a recommendation must be not only suitable to the client’s investment strategy and retirement goals, but also in the client’s best interest. It treats broker-dealers and their registered representatives as fiduciary investment advisors whenever they provide investment-related recommendations to retirement plans, plan participants and IRA owners.
The DOL rule treats recommendations to rollover from a plan to an IRA, and recommendations to convert brokerage accounts, such as A and C share mutual fund accounts, to fee-based advisory programs as fiduciary advice.
So what’s the big deal?
The big deal is that once the rule goes into effect, investment advisors will be legally responsible to provide their clients with advice that will not only suit their client’s investment strategies, but will avoid the payment of unnecessary commissions or broker’s fees in the process when it comes to retirement savings.
The DOL’s concern behind the rule is that some investment advisors were advising their clients to invest their retirement savings in investment vehicles that were suitable to their strategy, but that would yield higher commissions for the broker and ultimately reduce the client’s retirement savings. The DOL estimated that this inherent conflict of interest was costing individuals with retirement investments billions of dollars a year in brokerage commissions and fees.
Regardless of the new rule, individuals with retirement savings need to be diligent in their research about investments and feel comfortable with their investment advisor. If there is any concern about trust when it comes time to an advisor who is handling something as important as your retirement nest egg, then it is time to consider seeking advice from a new advisor.