For almost a decade, the DOL was concerned that retirement investors – those who invest in employee benefit plans – were traveling on “unstable ground” with their investment advisors. In other words, the advisors’ recommendations may have been more lucrative for them than for their clients. This concern led to the DOL’s new fiduciary standards rule, which more clearly defines the role of the financial advisor and the guidelines for proper financial advice.
The Financial Advisor: A More Reliable Avenue
Before the DOL’s new rule, there was a striking difference in the requirements for a fiduciary (i.e., a trustee) and for an advisor. Whereas a fiduciary is required to act in the best interest of a retirement plan participant, an advisor was required to decide only whether a recommended investment was suitable for an investor. Therefore, advisors could have met their requirement while focusing more on their profits than on their clients’ needs. With the new rule, financial advisors are legally required to act in their clients’ best interests when giving financial advice. But how does the DOL define “advice”?
The DOL states that an advisor provides investment advice when “making a recommendation that someone take a specific action, or refrain from doing so, and being compensated, directly or indirectly, for doing so.” It is important to note that more general information – that which may not be related to a person’s unique financial circumstances – are subject to the DOL’s new rule. According to the Plan Sponsor Council of America, such information includes:
- investment communications such as newsletters, market data, and promotional materials;
- general educational resources; and
- suggestions about an investment platform without regard to an individual’s investment needs.
Learn more about the fiduciary responsibilities that employee benefit plan sponsors have to plan participants.
New DOL BICE Rule: An Alternate Decision
In some cases, an advisor may suggest a course of action that best addresses the client’s needs but could result in a conflict of interest. For example, an advisor suggests that a client shift retirement savings from an account with a lower fee to one with a higher fee. Although this transaction is in the client’s best interest, it will also yield a higher profit for the advisor – and, therefore, result in a conflict. Given this possibility, the new DOL rule includes the best interest contract exemption (BICE).
Advisors qualify for the BICE if they (and their clients) sign a contract that does the following:
- acknowledges the advisor’s and the financial institution’s duty to act in the investor’s best interest,
- discloses fee information,
- states that neither the advisor nor the financial institution will provide misleading information about a transaction, and
- provides a list of policies and procedures that the advisor or financial institution will establish to diminish the impact of any conflict of interests.
CRI Can Help You Through the Fiduciary Standards Rule
Some parts of the DOL’s new rule still lie ahead. Specifically, the revised definition of “fiduciary advice” becomes effective April 10, 2017, and the BICE is on hold until 2018. Nonetheless, now is the time to gear up for the journey these new provisions may create. Contact CRI’s employee benefit plan team if you need more guidance on how the new rules may affect engagements with your advisors. And, if you are looking for a new advisor, then the team at Level Four® Advisory Services is ready to help you.