What the investment fiduciary rule means for you

The investment fiduciary rule was first introduced by the US Department of Labor (DOL) during the Obama administration in 2016. It required certain investment advisers to put the interests of their clients before their own. The rule was broad in terms of defining who was and was not a trustee and required such trustees to meet strict standards of conduct.

However, the Investment Trust Rule was struck down by the United States Court of Appeals for the Fifth Circuit in 2018. Since then, a host of new rules govern the conduct of investment advisers and brokers, including a new version of the fiduciary rule. It is important for investors to understand what it means to be a fiduciary, as well as who is and who is not.

Here’s what to know about the different rules, who they apply to and how they affect you as an investor.

Key points to remember

  • The investment fiduciary rule required some investment advisers to put their clients’ interests before their own, but not all advisers are required to meet this standard.
  • A financial advisor acting in a fiduciary capacity has an obligation to put the interests of their client first when giving advice and in all aspects of the client-advisor relationship.
  • If you are looking for an adviser who is bound to act in your best interests in all cases, you should look for an adviser bound to the fiduciary standard.

What is a fiduciary?

In general, a fiduciary is someone who has a duty to act in the best interests of another party. In the case of a financial adviser, an adviser acting in a fiduciary capacity has an obligation to put the interests of his client first when giving advice, as well as in all aspects of the client-advisor relationship.

Not all financial advisers are required to act as fiduciaries. Federally registered investment advisers (RIAs) with the Securities and Exchange Commission (SEC) are required to comply with the fiduciary standard. This also applies to state-level RIAs in some cases.

As a fiduciary, an RIA “must, at all times, serve the best interests of its client and not subordinate the best interests of its client to its own,” according to the SEC.

Brokers, usually registered with the Financial Industry Regulatory Authority (FINRA), are held to different standards. In June 2019, the SEC introduced Best Interest (Reg BI) regulation for these brokers to require them to meet higher standards (closer to fiduciary level but not as stringent) to which they were previously subject.

What is the fiduciary rule?

The fiduciary rule defines who is classified as a fiduciary and governs what investment advisers do within certain parameters. He says investment advisers who are fiduciaries must always put the interests of their clients before their own. It is not intended to be a prescriptive body or rules, but rather to offer exemptions to describe the type of transactions allowed.

The first iteration of the DOL fiduciary rule in 2016 was implemented under the Obama administration, but it was eliminated by the Trump administration when federal courts ruled that the DOL exceeded its regulatory authority.

Investment advisors and brokers may be compensated for certain investment products they recommend to their clients. This may encourage an advisor to make recommendations for their own financial gain rather than what is best for their client. This is the kind of conflict of interest that the DOL fiduciary rule attempted to resolve.

After the introduction of Reg BI, the DOL again submitted a proposal for fiduciary standards through an exemption which came into effect on February 16, 2021. This new rule serves to expand the definition of fiduciary advice to include investment advice regarding rollovers of retirement plans like 401(k)s and advice relating to Individual Retirement Accounts (IRAs).

This new exemption applies to RIAs as well as brokers, banks and insurance companies, and their employees, agents and representatives.

However, this new rule also allows advisors to receive compensation such as commissions, 12b-1 fees, or other mutual fund charges on accounts transferred from a 401(k) to an IRA. It also allows advisors to offer advice whether it is part of an ongoing relationship or the first step in a new ongoing relationship with the client. This type of compensation was prohibited before this exemption.

In order to comply with this rule, advisors must:

  • Acknowledge that they are fiduciaries under the Employees Retirement Income Security Act of 1974 (ERISA)
  • Disclose details of their relationship with their client in writing, including any conflicts of interest
  • Comply with impartial standards of conduct prescribed by the DOL
  • Provide the client with a written disclosure explaining why the rollover is in their best interest
  • Document why any transfer from a retirement plan to an IRA or from an IRA to another IRA is in the best interest of the retirement investor
  • Perform an annual compliance review and document it with the senior manager of the financial advisory or brokerage firm.

Investors should note that this exemption is not a fiduciary standard in its own right; it only concerns rollovers and retirement accounts.

What is the best interests standard?

Reg BI is a regulation that was promulgated in 2019 by the SEC. It is enforced by FINRA. Reg BI sets a standard of conduct for brokers and others who work with clients.

Reg BI includes:

  • Act in the best interests of clients when recommending investments and products
  • Avoid and disclose any conflict of interest (even potential) to clients
  • Document why a particular course of action is good for the client and not just someone in a similar situation

Reg BI also requires brokers and advisers to complete a client relationship summary known as the CRS form. This documents the client’s relationship with the broker or advisor, as well as the type of relationship between the client and the firm. It also discloses any conflicts of interest the firm or individual may have that could impact the client, the firm’s plans to meet Reg BI documentation requirements, and any disciplinary action against the company or individual brokers and advisers.

Fiduciary Rule vs Regulation Best Interest

The best interests standard is similar to, but still different from, a true fiduciary standard. Here’s how they differ.

Fiduciary standard Best interests standard
Applicable to RIAs, although the new exemption is applicable to a number of other financial institutions, including brokers, banks and insurance companies Applicable to brokers
Conflicts of interest are prohibited, although the new exemption creates certain situations where the adviser may receive compensation for an investment product provided that he meets certain requirements. Brokers must disclose any conflict of interest to the client
Fiduciary advisors must put the interests of the client first, no matter what Brokers must act in the best interest of their clients, but the best interest is not clearly defined by Reg BI

What is the impact of the fiduciary rule on individual investors?

There is no real overarching fiduciary rule per se. The Prohibited Transactions Exemption impacts investors working with an advisor or broker who are looking to transfer money from a 401(k) or similar retirement plan to an IRA. It also impacts those looking for advice on how to invest in an IRA account.

Do I need a trustee?

If you are looking for an advisor bound to act in your best interests in all cases, the answer is yes. All RIAs with the SEC are required to adhere to a fiduciary standard. Reg BI and the new exemption for prohibited transactions do not meet the fiduciary standard.

Before working with a financial advisor, ask them if they are fiduciary in all aspects of their relationship with you. Ask questions about how they are compensated and insist that they put this in writing.

Reg BI and the fiduciary exemption from prohibited transactions are two steps in the right direction. However, advisers working under these rules are generally not true fiduciaries. Investors should take the time to understand whether or not an advisor is a true fiduciary and then decide if that advisor is right for their financial situation.



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