Knut Rostad, president of the Institute for the Fiduciary Standard, was kind enough to send the following note correcting a statement from my April 27 blog, “Fee-only Fiduciary Confusion From the CFP Board.” The statement in question was about the Department of Labor’s new rules for IRA rollovers; specifically its new “best interest” standard. Rostad’s comment captures the basis for much of the current sentiment that the DOL may have compromised its new rules to the point of eroding investor protections.

My statement with which Rostad took issue read this way: “In contrast, the DOL’s recent extension of ERISA’s fiduciary standard to advisors who offer advice on IRA rollovers isn’t a blank slate. We have 42 years of legal precedent for what constitutes a client’s ‘best interest’ under ERISA itself, and 75 years of legal rulings of the advisory fiduciary duty under the Investment Advisers Act of 1940.”

As it turns out, I was only half right. Here’s what Rostad wrote to set me straight: “This is the direction in which the conversation needs to proceed. [However], one correction: Historically, ERISA has been about ‘sole interest’ as opposed to ‘best interest.’ Consequently, one basis for concern with the DOL’s new rule is the uncertainty with how ‘best interest’ will be defined in the courts.”

Then, to explain the difference between “sole interest” and “best interest,” Rostad cited fi360 CEO (and currently chair of the CFP Board, as well) Blaine Aikin’s May 13,2015 “Fiduciary Corner” blog: “What’s the Difference Between ‘Sole Interests’ and ‘Best Interests?’” In that blog, Aikin makes the distinction this way: “The sole interest standard is the more rigid standard, requiring that conflicts of interest in a fiduciary relationship be avoided entirely. Strictly speaking, a sole interest standard forbids even mutually beneficial transactions or compensation for the advisor. Just the opportunity for impropriety is enough to violate this standard, even if no actual harm occurs. […] A sole interest standard exists because of the highly vulnerable position investors and beneficiaries are put into when someone else has control of their assets. It is deeply embedded in trust law, which is the foundation upon which ERISA is built.”

In contrast, Aikin wrote, “A best interest standard is the more flexible standard. It allows for the fact that sometimes beneficiaries stand to gain the greatest benefit when the fiduciary can also benefit. The most obvious example of this is compensation. If compensation for advisors didn’t exist, professional advice would not exist either and disinterested, expert advice would be exceedingly difficult to come by.”

So, according to Aikin and others, with its new “conflicts of interest” rule, “the DOL has demonstrated a shift in its thinking, introducing a best interest standard when it had previously been reluctant to depart from the sole interest standard,” he wrote. “This effectively puts more control in the hands of practitioners to determine their own business practices, as long as they can justify that their decisions were of ultimate benefit to the beneficiary.”

Thus, the DOL’s “best interest” rule does indeed represent a substantial “watering down” of the ERISA standard that covers advice on pension assets, such as 401(k)s, but now doesn’t apply to rollovers into IRAs. While the DOL initially sought to close this legal “loophole,” in the department’s willingness to compromise with the securities industry, it has shifted from a strict rules-based approach, with essentially “no tolerance” for financial conflicts of interest, to a much more lenient “justify your actions” standard.

So while the securities industry is loudly voicing its concerns that the ambiguities of this new “best interest” standard for IRA advisors will have to be defined in the courts (with unknown consequences), the reality is that by simply using that language rather than “sole interest,” the DOL has fallen quite a bit short of closing the loophole for IRA advice: and therefore, failed to provide IRA investors with the same fiduciary protections enjoyed by other retirement investors. I suppose if the folks at SIFMA had collectively broken into their happy dance, it would have sent the wrong message.