Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are not aligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. As the retirement landscape has changed, retirement investors have suffered losses in the form of eroded plan and IRA investment results, often after rollovers out of ERISA–protected plans and into IRAs. The Department of Labor (“DOL”) recently finalized a rule that is intended to protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. The final rule aligns squarely with the DOL’s mission to educate, empower, and protect retirement investors when faced with important choices related to saving for retirement in their IRAs and employee benefit plans. The final rule is a culmination of the DOL’s multi-year regulatory project that began in 2009 in an effort to address issues with conflicts of interests in investment advice.
While the final rule defines who is a fiduciary investment adviser, accompanying exemptions allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation. These actors are still tasked with adhering to standards aimed at ensuring that their advice is impartial and in the best interest of their customers, however. The final rule specifically requires that those who provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries, IRAS and IRA owners must either avoid payments that create conflicts of interest or comply with the protective terms of an exemption. In addition, firms and advisers will be required to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer; charge only reasonable compensation; and make no misrepresentations to their customers regarding recommended investments. The DOL has expressed that the rule and its accompanying exemptions should help to reduce the more than $17 billion per year the government claims retirement investors lose as a result of conflicted advice.
The rule discusses the types of communications that constitute investment advice and further, describes the kinds of relationships in which those communications would give rise to fiduciary investment advice responsibilities. The fundamental threshold element in establishing the existence of fiduciary investment advice is whether a “recommendation” occurred. The DOL has taken an approach to defining “recommendation’ that is consistent with the approach taken by FINRA. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.
The rule defines covered investment advice as “a recommendation to a plan, plan fiduciary, participant, . . . beneficiary and IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA.” Recommendations as to the management of securities or other investment property are also included in the rule’s definition of “investment advice”. The DOL also explains what is not covered investment advice under the rule.
Compliance with the rule will be required beginning in April 2017. Not surprisingly, brokerage, advisory and insurance firms around the nation who offer advice within the retirement services market, will need to adjust their operations and procedures to comply with the rule. The DOL’s Fact Sheet regarding the final rule contains a thorough explanation of the rule’s requirements and related exemptions and can be accessed here.