According to the Department of Labor (DOL), financial advisors, insurance agents, consultants, and other similar fiduciaries are obligated to act in their clients' best interests, putting their clients' needs ahead of their own.
It allows no opportunity for consultants to hide any possible conflict of interest and stipulates that all charges and commissions for retirement accounts and planning guidance must be explicitly disclosed in quantitative terms to clients.
Those hoping to learn more about the new fiduciary rule can find everything they need to know in the article below.
What Has Changed?
A fiduciary may be defined as a person responsible for overseeing an asset investment, so the fiduciary rule applies when defining the responsibility of such a person to conduct their dealings in good stead.
The U.S. government defines fiduciary duty. Over time, the government has implemented new fiduciary guidelines that include various financial professionals, such as brokers and the overseers of pension schemes and individual retirement accounts.
The scope has been broadened to include any expert who advises or makes a solicitation in this field, rather than just offering ongoing guidance. Fiduciaries were previously defined as advisors who charged fees for these services (either by the hour or as a portion of the client's account holdings) on retirement accounts.
Fiduciary Versus Suitability
A fiduciary has a significantly greater responsibility than the suitability requirement formerly expected from financial salespeople who engage with retirement accounts, including financial planners, brokers, and insurance agents. Suitability implies that when a financial investment is recommended, it must be appropriate to fulfill a client's stated purpose.
Financial experts are lawfully obliged to place their clients' best interests first instead of simply identifying investment opportunities that suit their preferences. As a result, the rule change would have removed many of the industry's commission structures.
In situations in which a conflict of interest might arise, consultants who wanted to continue operating on a commission fee basis would have to present their clients with a Best Interest Contract Exemption (BICE).
This was done to ensure that the consultant always acts in the client's best interests. The amount of pay paid to the fiduciary has to be explicitly stated.
Whom Does This New Rule Affect?
Below are some agents or businesses that have likely felt the effects of the new fiduciary rule.
Broker-dealers and RIA businesses
Compliance costs were likely to rise because of new DOL guidelines, particularly in the broker-dealer industry. These expenses were also predicted to rise for fee-only consultants and Registered Investment Advisors (RIAs).
Small, unaffiliated broker-dealers and RIA businesses may have been hit hard by the fiduciary mandate. They may not have had the monetary resources or regulatory competence to fulfill all criteria stipulated by the DOL.
As a result, some of these businesses may have had to close or be absorbed into larger ones. Small businesses weren't the only ones affected, either. American International Group and MetLife Inc. liquidated their brokerage firms because of these requirements and the associated costs.
401(k) Planners and Annuity Providers
Additionally, financial consultants in Pittsburgh PA and licensed representatives involved in 401(k) planning advice may have been driven out of the profession by their broker-dealers.
Annuity providers would also have been required to reveal their fee structure to their clients.
This could have resulted in a considerable reduction in the sales of these investment plans in many situations. The reality is that this topic has been greatly debated amongst experts in the industry since they typically pay substantial commissions to salespeople. They also come with a slew of penalties and charges that can dramatically diminish clients' profits.
An Example of the Fiduciary Rule in Action
The Department of Labor issued a fiduciary regulation in 2012 that outlined how fiduciaries analyze and report the methodology used in running a 401(k) account.
This rule first emphasized that the duty of investing 401(k) resources falls under fiduciary obligation, which means that anybody who manages a 401(k) account for someone else must adhere to the greatest degree of care.
The regulation also required disclosure so that plan participants may make better decisions on where to invest their retirement money.
Final Thoughts
The DOL has implemented the new fiduciary rule to help ensure that those deciding on where to invest their money, such as those wondering if they can take their pension and invest it themselves, can get the best possible service intended to cater to their needs and not the needs of the advisor or agent. To learn more about the new fiduciary rule, clients can visit the DOL website.
Disclosure:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.