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Regulation and Compliance > Federal Regulation > DOL

The DOL fiduciary rule, duties to consumers, and the Best Interest Contract Exemption

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Financial advisors affected by the U.S. Department of Labor’s (DOL) so-called Conflict of Interest Rule have many unanswered questions and plenty of concerns regarding the new regulations.

However, at its core, the DOL fiduciary rule aims to protect consumers receiving retirement investment advice inside of qualified retirement plans and IRAs.

Financial advisors will need to ensure they have a thorough understanding of the rule and how it affects their practice. Part of that understanding will include being able to talk to clients about the rule, as they have no doubt encountered media coverage surrounding it.

Your duties as a fiduciary

Client-advisor engagements can often be transactionary. The DOL ruling aims to significantly reduce the conflicts of interest that can occur in a transactional sale, making the advice to clients more about planning and less about selling.

As your clients have questions about what it means to be a fiduciary, you can frame the conversation around a duty of loyalty to act in your client’s best interest. An advisor held to a fiduciary standard of care is bound to the following duties:

A duty of care

  • Act with prudence
  • Avoid misleading facts and information
  • Serve as basis for investment and retirement advice
  • Support industry best practices

A duty of loyalty

  • Work in the best interest of clients
  • Put interests of clients above your own
  • Minimize conflicts of interest

 A duty of obedience

  • Agree to terms of engagement
  • Follow instructions provided by the client

A duty of good faith

  • Provide transparency in information
  • Conduct business in fairness

How will consumers benefit from the new DOL ruling?

By mandating that a retirement advisor providing investment advice to an IRA, rollover, or qualified plan act in a client’s best interest first, the DOL rule aims to protect consumers from losing money to hidden fees or by investing in products that do not suit the client’s best interests.

Since the DOL rule requires many more financial professionals to maintain a fiduciary standard and treat their clients with loyalty and obedience, consumers of retirement income advice will no longer have to discern which type of advisor they are working with, or attempt to address conflicts of interests unique to specific business models. Additionally, there will be more required fee, business practice, and fiduciary role disclosures to the client. These disclosures make clients aware of how their advisor is compensated, any potential conflicts, and that the advisor is a fiduciary.

Below are some of the transactions that subject an advisor to a fiduciary standard of care under the new DOL rule:

  • Advice given to a qualified retirement plan
  • Transactions within an IRA account
  • Advice regarding rollovers to an IRA account

The new DOL rule also protects consumers through what is known as the Best Interest Contract Exemption, or BICE.

What is the best interest contract exemption?

According to the DOL, the BICE is a means for consumers to hold financial service firms accountable for providing advice in the best interest of the consumer.

The DOL says that the BICE is especially important for advice regarding IRA investments because it creates a way for consumers who suffer monetary losses due to conflicted retirement investment advice to hold their advisor and the financial institution accountable. The BICE comes into play when there are certain conflicts of interest present and when certain products, such as a variable annuity, are sold to a client inside of an IRA.

What does the new DOL rule mean for advisors?

The DOL rule changes usher in a new era in financial services. Compensation models surrounding retirement advice will need to change in response to the new regulations, certain products will change, companies will enter and leave the IRA marketplace, and advisors will be challenged with proving that their services and advice are worth the fees they charge.

This means advisors will not only need to thoroughly educate themselves on the intricacies of the new DOL rule, but they’ll also need to be prepared to document why their advice was prudent and how it will help the client. This requires understanding the best practices surrounding IRA investments, IRA rollovers, and distributions.

A prudent financial advisor should get the education required to do business in this new regulatory environment now, before the finalized rule takes effect, rather than later.


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