What You Need to Know
- Labor’s proposal to define “investment advice fiduciary” updates the classification of financial professionals.
- The provider-client relationship centers on advisors’ discretion around investment recommendations.
- The proposed amendments would sharply limit the availability of prohibited transaction exemptions.
The Department of Labor has released its proposed replacement for the definition of “investment advice fiduciary.”
Under the proposal, a financial services professional would be classified as an investment advice fiduciary if (1) the provider offers investment advice or makes investment recommendations to a retirement investor, (2) for a fee or compensation and (3) the financial services provider makes the recommendation within a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in the investor’s best interest.
Generally, the relationship prong may be based on the providers (1) having discretion over investment decisions for the retirement investor, (2) making investment recommendations to investors on a regular basis as part of their business, or (3) stating that they are acting as a fiduciary when making investment recommendations.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether the DOL’s newly proposed fiduciary rule changes would have a negative impact for retirement investors.
Below is a summary of the debate that ensued between the two professors.
Byrnes: This new standard will greatly expand the reach of the fiduciary standard. This proposal effectively guts the “regular basis” prong of the existing five-part test. By doing so, the DOL will impose fiduciary liability on advisors who don’t have any real advisor-client relationship with certain individuals. If anything, the expanded fiduciary status will simply lead advisors who aren’t otherwise covered by the fiduciary definition to avoid making those types of recommendations.