Investment professionals are now taking steps to implement the changes required by the Department of Labor’s (DOL) fiduciary rule, which went into effect starting this month.
The finalized rule broadens the definition of investment advice. It requires that advisors put their clients’ needs first, avoid or manage conflicts of interest, and comply with new requirements for receiving commission-based compensation. As a result, many advisors with 401(k) and individual retirement account (IRA) investors will need to adapt accordingly.
The rule changes the way advisors do business.
It prevents investment professionals from receiving compensation in the form of commissions, unless they qualify for an exemption.
To adapt to the new rule, investment professionals can:
- Become fully acquainted with the final rule and how it will impact their practice
- Understand the timeline for both the rule and exemption requirements
- Review Capital Group resources that can help them navigate the new regulatory landscape
Impact on the Commission-Based Model
Commission-based retirement investment professionals are currently held to a suitability standard rather than the more stringent fiduciary standard.
The new rule will impose a fiduciary standard that mandates that these advisors act solely in the best interests of each client.
The fiduciary standard encourages advisors to avoid commission-based compensation and instead to charge fees typically based on the size of a client’s assets under management.
When Will This Happen?
The rule went into effect on June 9, but retirement investment advisors will have until January 1, 2018, to come into full compliance with a number of the provisions in the rule — notably the provision that allows advisors under certain circumstances to continue to accept commissions for the sale of investment products. This provision is known as the Best Interest Contract (BIC) exemption.
A Best Interest Contract Requirement
To take advantage of the BIC exemption, broker-dealer firms must agree that they and their advisors will:
- Meet fiduciary norms of loyalty and prudence
- Avoid misleading or incomplete statements
- Receive no more than reasonable compensation
- Disclose conflicts of interest
- Maintain and comply with policies, procedures and advisor compensation practices that minimize conflicts of interest
Grandfathering Rules to Minimize Disruption to Existing Client Investments
The grandfathering provision largely maintains old rules with respect to investment decisions made before June 9. In addition, the provision may cover advice given after that date to hold or exchange a grandfathered asset according to a fund family’s rights of exchange policy.
Advisors may also receive commissions from some new fund purchases, but only if those purchases are part of a systematic contribution plan established before June 9.
The grandfather provision will particularly benefit advisors who receive 12b-1 fees for transactions involving A- and C-share mutual funds and variable annuities.
How Can I Find Out More?
Capital Group’s Policy Spotlight webpage is a central resource for information about the DOL fiduciary rule.
We will continue to provide insights and tools designed to help advisors adapt to the changing landscape and prepare for conversations with their clients.