DOL Affirms Fiduciary Rule Phase In

Financial sector firms will have to gear up for implementation of the U.S. Department of Labor’s conflict of interest rule, as it’s been affirmed that major portions of the fiduciary rule will become applicable June 9. On that day, those providing advice on retirement assets will be considered fiduciaries and will have to comply with the impartial conduct standards of the rule to receive particular forms of compensation, such as commissions.

Some of the more operationally intensive aspects of the rule, such as entering into a best-interest contract with clients and certain disclosures, aren’t scheduled to be implemented until Jan. 1, 2018. We are maintaining our fair value estimates and moat ratings for financial sector firms, as we have long held that the United States would eventually adopt more fiduciary-like standards, and the continuation of financial sector trends, such as increased use of passive investment products and fee-based accounts, is already firmly established.

While some might view the Department of Labor’s field assistance bulletin with its emphasis on "assisting (rather than citing violations and imposing penalties)" during the transition period, we would note that other parts of the bulletin and the frequently asked questions section seem to indicate that the Department of Labor wants to see real changes at firms even during the interim period.

The bulletin states, "The department will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions." The assistance, instead of penalties, from the department is conditioned on good-faith efforts from the financial firms.

Additionally, while many disclosure requirements don’t come into effect until Jan. 1, 2018, the FAQs regarding recommendations with conflicts of interest state, "The adviser should be candid about the compensation and the limits on investments."

The impartial conduct standards are a core part of the fiduciary rule package that goes into effect June 9 and is based on three tenets. (1) Advice should be in the best interest of the retirement investor. This means that the advisor adheres to a professional standard of care and puts the interests of the client before its own financial interest. (2) The advisor charges no more than reasonable compensation. (3) The advisor doesn’t make misleading statements.

We agree with the Department of Labor that even with these minimum principles in place for financial advisors and wealth management firms during the interim period, retirement investors will begin to accrue the benefits that the DOL quantified in its regulatory impact analysis.

Use our checklist to help you adopt the new fiduciary standard.