On April 8, 2016, the Department of Labor (DOL) issued a 208 page final regulation containing rules that investment advisors need to follow when they give investment advice to certain “clients”–plan sponsors, fiduciaries and participants in tax favored retirement plans, including Individual Retirement Accounts and 401(k) plans. The DOL’s concern is that the advisors may not be acting in their clients’ best interests if they recommend investments to the clients which may provide more compensation to the advisor without benefitting the client. The regulation isn’t effective until April of 2017—but many investment advisors will now begin to adjust their approach to providing advice to these clients. Let’s take a brief look at what the regulation says, and provide some thoughts on its impact.
What it says
Advisors (individuals and companies) who make individualized investment recommendations to their clients for a fee or other remuneration will no longer be able to do this without making enhanced disclosures to their clients. The clients and the advisor will execute a ‘best interest contract’ (BIC) in which the advisor:
- Accepts responsibility as a fiduciary under ERISA
- Agrees to provide prudent advice that is in the client’s best interest
- Discloses conflicts of interest
- Discloses the fees that the advisor will receive for each investment from both the investment sponsor and any third parties
If the advisor violates these rules, the clients could hold them accountable through breach of contract claims (for IRAs) and under ERISA (for ERISA plans, including tax qualified retirement plans).
There are a fair number of exemptions to this regulation, and we will discuss those at a later date.
How does it affect investors and investment advisors?
There is nothing more certain in life than change, and this piece of legislation is the most significant change in the retirement and IRA marketplace since the Employee Retirement Income Security Act of 1974.
From the investor prospective the final version of the rule places further fiduciary standards and best practice standards on the advisor community. This is usually not a bad thing as most advisors currently work within the best interests of their clients. Additionally investors might see some competition from a fee perspective.
Since discussion over this legislation began six years ago until it was released last week, there has been pushback from the financial services community. While the advisors in our office agree the best interest of the client should always come first, it was perceived that the proposed ruling could have forced us out of the business of working with those prospects and clients with smaller retirement accounts. The reason being because the compliance requirements and liability taken on by our advisors could have made it a cost prohibitive relationship for both sides.
At the end of the day, acting in the best interest of the client is never a burden. In fact, it’s a privilege.
The regulation can be found at here.
Keep an eye out for more on this topic in the coming months. In the meantime, if you would like to discuss its ramifications to you as a participant or the program that you sponsor or are a fiduciary of, please call Robert Coode or Ted Ginsburg at 440-449-6800. You may also contact our Compensation & Benefits Advisory Services Group at 440-449-6800.
Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.