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.”