Broker Check

The New DOL Fiduciary Rule for Investment Advice

April 22, 2016

“You Mean They Weren't Acting In Our Best Interests To Begin With?”

On April 06, 2016, the investment industry was rocked by a much anticipated Department of Labor Fiduciary Rule that obliges financial professionals who are compensated by offering investment advice for retirement plans to act in the best interests of their clients. You are probably not alone If you are asking “Huh? If acting in our best interests is the new rule; what on earth was the standard beforehand? Below I will do my best to summarize the complex rule that will require full compliance by April 10, 2017, on most aspects of the rule, and by January 01, 2018, on other provisions of rule.

The Fiduciary Rule is currently delayed to be implemented on June 9, 2017.

What Is It?

The Department of Labor’s landmark “fiduciary” rule pertains to intermediaries giving investment advice in accounts such as 401(k) plans, and IRAs. Those giving investment advice must adhere to a “fiduciary” standard as laid out under the Employee Retirement Income Security Act of 1974. Until now, brokers have been able to operate under a less-stringent “suitability” standard that only required brokers to attest that the product in question was suitable for the client – with no reasonable limits on the amount of compensation a broker/adviser could receive.

Why the Rule?

The percentage of workers in the private sector whose only retirement account is a defined benefit pension plan is now 4%, down from 60% in the early 1980s¹. That means that most employees today are responsible for managing their investments and shouldering all the risk of losing principal. Over the past few decades, the transition from the employer assuming all the investment risk to the employee has created a need for competent advice for the employees who have retirement funds at work and who eventually roll their investments into individual retirement accounts. As a result, a wide range of financial institutions and various financial professionals with unfamiliar designations provide many different services and products. For the average investor, it can be quite overwhelming to try and understand everything there is to know, let alone the essential basics of most financial matters. The vulnerability of the general investing public eventually led to a standard that requires all those who give investment advice relating to retirement accounts should act in the best interests of their client – a fiduciary duty.

If Physicians, Attorneys, and CPA’s all have a fiduciary duty to act in their client’s best interest, it only seems natural, if not obvious, that those who provide investment advice should at the very least be held to an equivalent standard.

What Does It mean To The Investor?

Initially, it would appear that the rule represents positive news for the average investor who can only benefit from a change requiring their financial advisers to act in their best interests. But opponents of the rule claim that many smaller investors will not receive adequate advice due to cost and compliance constraints placed on brokerages and firms. Nevertheless, the investor can expect to receive:

  • Fiduciary (Best Interests) Standard with respect to investment advice to the Retirement Investor.
  • Adhere to “Impartial Conduct Standards” which requires the fiduciary advisor to:
    • Give advice that is in the retirement Investor’s best Interest;
    • Charge no more than “reasonable compensation”; and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest
  • Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards
  • Refrain from giving or using incentives for Advisers to act contrary to the customer’s best interests; and
  • Fairly disclose the fees, compensation, and Material Conflicts of Interest, associated with their recommendation.

Although the rule states that brokers/advisers can no longer earn commissions and other forms of conflicted advice compensation from consumers, there is an exception available that is called a Best Interests Contract (BIC) Exemption that requires a signature from the client. The exemption would allow firms to continue to set their own compensation practices so long as they, among other things, commit to acting in their client's best interest first and disclosing any conflicts that may prevent them from doing so. Common forms of compensation in use today in the financial services industry, such as commissions and revenue sharing, would be permitted.


Considering the new DOL rule contains over 1,000 pages, there is much more to this rule and no doubt you will hear more about it in the next several months because it is significant; it threatens to dramatically alter the landscape of investment advice. In addition, this rule only pertains to retirement accounts, not non-qualified accounts (taxable), but I would suspect that the positive results from this rule will ultimately lead to a change in non-retirement accounts as well (regulated by the SEC, not the DOL). While time will gradually define what is meant by “best interests,” I feel the answer to the question “What do I expect from my adviser?” should be the guide to what advisers should aspire to.

As a Certified Public Accountant for the past thirty years, I’ve always assumed fiduciary responsibility for both my accounting and planning functions. I’m a Certified Financial Planner Practitioner® and an Independent Fee-Only Registered Investment Adviser, which both mandate fiduciary care.

Please feel free to contact us if you have questions about the rule or would like to learn more about the services we provide. We offer a no-charge initial consultation.