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Capital Group Policy Spotlight

April 29, 2016

The DOL’s Final Rule: Broadened Standards and Practice Changes for Advisors

On April 6, the Department of Labor (DOL) issued its finalized fiduciary rule. Over a year in the making, this final rule will have a significant impact on how retirement investment advice is delivered in the United States.

Financial advisors with clients in retirement plans, including 401(k) plans and individual retirement accounts (IRAs), will be considered fiduciaries to their clients beginning on April 10, 2017. This means advisors will be legally required to put their clients’ needs before their own and dispense advice that is solely in the best interests of their clients.

While the final rule retains many similarities to last year’s proposed version, the DOL did revise some key elements, including the Best Interest Contract (BIC) exemption and the addition of a grandfathering provision.

Capital Group encourages financial advisors to direct specific questions to their individual firms.

A Broader Category of Fiduciaries

Under the rule, investment professionals who advise investors in employee-based retirement plans and IRAs will become fiduciaries. While most advisors already make recommendations in their clients’ best interests, the rule creates compliance process requirements that document adherence to the standard. This opens the door to potential legal consequences for violations.

To comply with the rule, fiduciaries:

  • Must avoid conflicts of interest
  • Must disclose sources of compensation
  • May not accept commissions for the sale of investment products without an exemption (BIC, described below)

A Broader Definition of Investment Advice

The new rule significantly broadens the definition of advice to include recommendations relating to the general management of retirement investment portfolios. To be subject to the fiduciary standard under the new definition, investment advice no longer has to:

  • Be delivered on a regular basis
  • Be individualized
  • Serve as the primary basis for investment decisions

As such, most advice delivered to clients about how to invest their retirement savings will now be held to the fiduciary standard. This includes recommendations to roll over employer-based accounts to IRAs.

Restrictions on Commission-Based Compensation and the Best Interest Contract Exemption

The new rule may achieve the clients’ best interests requirement in part by discouraging commission-based relationships in favor of fees as a percentage of total investments.

However, the fiduciary rule does allow an exemption that lets advisors continue to receive commissions. To qualify for the exemption, advisors and their clients will have to sign a BIC when the client opens an account.

The BIC acknowledges a commission-based relationship and stipulates that the advisor:

  • Is a fiduciary to the client
  • Must provide advice that is impartial, commensurate with compensation, and in the client’s best interest

In the rule’s final version, the DOL revised the BIC section to make the exemption more practicable. For example, while it empowers clients to request more detailed disclosures on costs and fees, the DOL struck certain mandatory disclosures, such as one-, five-, and 10-year fee projections, from the final rule. Moreover, all asset classes are now available for commission-based advice within a BIC. This contrasts to the more limited set of assets in earlier versions of the rule.

Grandfathering Rules to Minimize Disruption to Existing Client Investments

The grandfathering provision largely maintains old rules with respect to investment advice and decisions made before April 10, 2017. This allows advisors to accept ongoing commissions from mutual fund investments established before that date.

Advisors may also receive commissions from some new fund purchases, but only if those purchases are part of a systematic contribution plan established before April 10, 2017.

Implementation

The fiduciary rule takes effect on April 10, 2017. However, the DOL adopted a phased implementation approach to the BIC exemption. The final rule provides a transition period, from April 10, 2017, to January 1, 2018, to allow advisors and financial institutions more time to prepare for compliance with all the exemption’s stipulations.

Continue to check our Policy Spotlight webpage for updates and more detailed content about the final fiduciary rule over the coming weeks.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

This material is intended for use by financial professionals or in conjunction with the advice of a financial professional.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.