On June 9, 2017, the Department of Labor’s Fiduciary Rule went into effect. The rule, also known as the Conflict of Interest Rule, expands the fiduciary definition under the Employee Retirement Income Security Act of 1974 (ERISA). In the simplest terms, the DOL Fiduciary Rule will require advisors to put their client’s interests ahead of their own when giving advice to retirement accounts such as 401(k)s and IRAs. Further, any potential conflict of interest must be disclosed along with a clear statement of the fees and commissions received in exchange for the advice.

While June 9 is the applicability date for the fiduciary regulation itself, it will be phased in between now and December 31, 2017 with full compliance required on January 1, 2018. During this transition period, the DOL and the IRS will not pursue claims against fiduciaries “who are working diligently and in good faith to comply” with the Rule.

Limited Impact on Independent RIAs:

Prior to the Rule, a fiduciary was generally defined as a person who provided individualized investment advice on a regular basis for compensation. The revised definition will now apply to all financial professionals making investment recommendations to retirement accounts. Financial salespersons (brokers, planners, insurance agents) that previously only needed to meet a “suitability” standard are now required to meet the higher fiduciary standard. Suitability simply meant that as long as an investment recommendation met a client’s defined needs and objectives, it was deemed appropriate.

Independent registered investment advisors (RIAs), such as Axia Advisory, were already fiduciaries under the previous definition, and in the case of ERISA plan clients, already acknowledge their fiduciary status in writing as part of their 408(b)(2) disclosures.  And because the DOL’s “best interest” standard is essentially the same as ERISA’s fiduciary standard, the Rule does not significantly change the requirements that apply to RIAs when advising clients.

Impact on Commissioned Advisors (Broker/Dealers):

Financial advisors who work on commissions, such as brokers and insurance agents, will be impacted the most by the new Rule.  While receiving commissions will not be prohibited, advisors who wish to continue working on a commission basis will be required to provide clients with a disclosure agreement called a Best Interest Contract Exemption (BICE). The BICE must be used in situations where a conflict of interest could exist, such as the advisor receiving a higher commission or special bonus for selling a certain product. The financial institution overseeing an advisor-client relationship requiring a BICE must:

  1. Acknowledge fiduciary status
  2. Adhere to the DOL’s “Impartial Conduct Standards” which require the advisor to:
    • Give advice that is in the investor’s best interest
    • Charge no more than reasonable compensation, and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest
  3. Implement policies and procedures to prevent violations of the Impartial Conduct Standards
  4. Refrain from giving or using incentives for advisors to act contrary to the customer’s best interests, and
  5. Fairly disclose fees, compensation, and material conflicts of interest, associated with their recommendations.

Axia Advisory is and always has been a fiduciary and we applaud the DOL’s efforts to hold financial advisors to a higher standard. Putting client’s interests ahead of our own is a principal upon which Axia was founded. If you have any questions about the Fiduciary Rule, please contact us at (888) 609-2942 or info@AxiaAdvisory.com.