The DoL announced a proposed rule in April 2015 that it said would protect 401 and IRA investors by mitigating the effect of conflicts of interest in the retirement investment space. The matter triggered heated discussions in the financial and political world and is part of what remains a wider debate over the fiduciary obligations of broker-dealers.

At present, RIAs must adhere to a “fiduciary” standard under the Investment Advisors Act 1940, while brokers operate under a “suitability” rule. This means that, while recommendations made by brokers must be suitable, they don't have to be in an investor's best interest – a standard that critics have argued has encouraged some advisors to charge excessive fees or favor investments with hidden commissions.

“This new set of rules is profound and important for investors,” Michael Zeuner of WE Family Offices told Family Wealth Report. “While it technically only relates to retirement accounts, let’s hope that advisors deliver, and investors demand, fiduciary care in all of their investment advisory relationships.”

The White House said in a statement that the DoL has “streamlined the rule and exemptions to reduce the compliance burden and ensure continued access to advice, while maintaining an enforceable best interest standard that protects consumers.” It added that the retirement protections add to stronger rules of the road for mortgages, credit cards and student loans, among others. The implementation will happen in phases but the rules will take full effect as of January 2018.

Industry reactions

“We are pleased that Secretary Perez and the Department of Labor staff have worked to address many of the practical concerns raised during the comment period,” said John Thiel, head of Merrill Lynch Wealth Management. “Most important, we support a consistent, higher standard for all professionals who advise the American people on their investments,” Thiel said. “As we study the details of the final rule, we hope to continue what has been a constructive dialogue with the Department about how to implement a best interest standard effectively and efficiently for the benefit of our clients, advisors and shareholders.”

Kathleen McBride, chair of The Committee for the Fiduciary Standard, said: “Fiduciary advice is essential to help the retirement investor attain their long-term goals in 401 or IRA accounts. It’s particularly important when many investors face a critical decision if they leave a company or retire, and consider a rollover from a 401-type account to an IRA.”

There are, of course, opponents to the move.

The National Association of Plan Advisors, for example, described the proposal last year as an “attack” on many advisors. “People should be protected from unfair and deceptive practices,” said Brian Graff, executive director at the NAPA, at the time. “But all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust simply because they offer different financial products — like annuities and mutual funds — with different fees.”

Similarly, the executive director of Equity Dealers of America, Chris Iacovella, yesterday called for use of the Congressional Review Act to examine the rule, calling it a “disaster for millions of hard-working Americans.” Iacovello argued that the DoL has “put forth a rule that reduces access to financial advice for millions of low-income Americans and retirees, damaging their ability to save for and live in comfortable retirement... DoL’s rule also picks winners and losers among financial firms. Before we call this a win for consumers, we need to consider just exactly which too-big-to-fail Wall Street banks will get richer as a result of this ill-informed policy.”

There are a number of factors to consider with this move, such as: understanding the sheer intricacies of the rule and exemptions; the cost of compliance; its impact on investors across the entire wealth spectrum ; and how it may alter the wealth management landscape, particularly given the advent of robo-advisors. Also worth noting is that it may bring business benefits for those that don’t already operate as a fiduciary. In anticipation of the ruling, for example, the independent advisor Financial Engines released results of a survey indicating that the majority of Americans feel it is very important that all financial advisors be legally required to work under a fiduciary standard.

With that said, it has also been argued previously that, until the role of a fiduciary is fully understood by the public, the term holds little meaning or impact.

“The DoL regulations clarify what it means to put a client’s interests first as a fiduciary, and don’t water it down. The more advisors adopt the standard across their entire business practices, not just around retirement accounts, the better for investors,” Zeuner said. “The more investors come to truly understand the difference between fiduciary and suitability, the more demand there will be for true fiduciary advice, and less tolerance there will be for sales practices disguised as advice. Investors come out the winners here, and that’s the key point.”

Industry impact

Jean-David Larson, director of regulatory and strategic initiatives at Russell Investments, told this publication that while the final rule “appears to have made meaningful accommodations to be more business model agnostic than when it was first proposed,” it “will affect transaction-oriented advisors far more than advisory-oriented advisors given that most advisors should be able to avail themselves of the DoL’s new streamlined approach for level-fee arrangements.” Larson said he anticipates that the industry will continue to see a shift from brokerage to advisory.

“A recent survey published by Russell Investments revealed that a majority of advisors were not planning to make significant, immediate change until after the rule is passed,” he continued. “The longer timeline adopted by the DoL will allow additional time for advisors to adapt their business models.”

Larson also highlighted that “significant regulatory change” - such as with this rule - has the potential to create challenges as well as opportunities. “Complying with increased fiduciary standards has heightened the importance of practices which Russell Investments has long encouraged its partners to incorporate to help maintain a competitive advantage and build sustainable business models which deliver lasting, high-quality client service. Those advisors who are able to engage the rule with a focus on operational excellence will likely find benefits on the competitive landscape,” he said.

“All financial professionals will be under the same rules and definition of a fiduciary, practicing the same principles of expertise, alignment, and accountability which have long applied to the institutional market. Many of the changes necessitated by the rule are rooted in best practices already used by top firms—regardless of current market and industry pressures.”