The Department of Labor fiduciary rule has recently undergone a series of setbacks and delays—but that hasn’t changed the fact that it has triggered a fundamental shift in the way many advisors currently do business.
Evidence of this shift is perhaps most prominent among advisors who provide retirement-related advice for major financial firms. Several major firms have recently joined the bandwagon of firms that prohibit commission-based compensation for financial advisors who act in a fiduciary capacity in providing advice related to 401(k) accounts—reinforcing the idea that the level fee compensation trend is here to stay regardless of the fate of the fiduciary rule.
The Level Fee Trend
The DOL fiduciary rule generally discourages advisors from charging a commission-based fee because of the perception that doing so may lead the advisor to act primarily in order to increase his or her commissions, rather than in the best interest of clients (i.e., creating a conflict of interest). Level fees, on the other hand, tend to promote the idea of transparency in the compensation context.
As the name suggests, level fee advisors receive a flat fee that is often expressed as a percentage of the client’s 401(k) assets that are managed by the advisor. In other cases, the fee may be an upfront payment resembling a “subscription” type arrangement.
The level fee must still be reasonable, based on market standards, although this is not a term that has been strictly defined by the DOL.
While the full applicability date of the DOL fiduciary rule has been delayed (until July 1, 2019 for many provisions), some of its provisions did go into effect on June 9, 2017. Generally, as of June 9, advisors must satisfy certain impartial conduct standards, which means that they must (1) make no misleading statements to clients, (2) receive only reasonable compensation and (3) make investment recommendations that are in the client’s best interests.
Fiduciary Rule Appeal
Under the fiduciary rule, many advisors who provide advice with respect to 401(k) plans or rollovers are now treated as fiduciaries subject to the heightened standard of responsibility. Therefore, although the rule is only partially effective, major firms have begun requiring advisors who provide 401(k)-related advice to do so only as fiduciaries receiving a level fee.