Fiduciary Rule Redux: Comparing Today’s Standard to Obama’s Era

The Department of Labor has once again released a new standard to govern when an individual will be classified as an investment advice fiduciary. While many firms and advisors may be wary of changing policies once again to comply with yet another new standard, the formal effective date for the revised fiduciary definition itself is just a few short months away in September. Financial services professionals should be aware that the DOL is specifically focused on applying the new standard to situations involving one-time advice, including rollover advice. The new standard may be similar to the Obama-era standard, but it is by no means identical, meaning that advisors should take the time now to familiarize themselves with the new standard and potential compliance changes that will become necessary if the rule survives expected legal challenges in its current form.

2024 Changes to the Investment Advice Fiduciary Test

Pursuant to the 2024 DOL standard, someone is classified as an investment advice fiduciary if: (1) they make an investment recommendation to a retirement investor, (2) the recommendation is provided for a fee or other compensation (including commissions), whether direct or indirect, and (3) the individual holds itself out as a trusted advisor by either stating that it is acting as a fiduciary under Title I or II of ERISA, or making the recommendation in a way that would indicate to a reasonable investor that it is acting as a trusted advisor making individualized recommendations based on the investor's best interests.

In plain English, when a person makes an investment recommendation to a retirement investor for any type of direct or indirect compensation, fiduciary status will apply if the person is generally in the business of making investment recommendations. The recommendation must also be individualized, based on the person’s professional judgement and to be relied upon by the investor as being in their best interests (based on the objective circumstances and what is reasonable in the situation).

Specifically, the new standard also closes what the DOL calls the "one time advice loophole". That means one-time rollover transactions and annuity sales can create fiduciary status if the elements of the investment advice fiduciary standard are otherwise satisfied.

Obama-Era Standard

Under the pre-existing definition of investment advice fiduciary, fiduciary status applied when someone made a recommendation (whether directly or indirectly) and that person (1) acknowledged their fiduciary status, (2) provided the advice pursuant to some type of agreement or understanding that the advice was based on the recipient’s individual situation or (3) directed the advice toward a particular group or individual regarding whether a particular investment or decision with respect to investment assets of a plan or IRA was advisable.

While the wording is similar, the new regulation contains additional requirements, both that a reasonable investor would have concluded that the recommendation was based on their best interests and that the recommendation was based on an exercise of professional judgement.

Conclusion

While there is no way to be completely certain how the courts will react to the DOL’s latest fiduciary standard, legal challenges seem inevitable. Still, the new rule is currently scheduled to take effect September 23 2024, with the exception of a built-in one-year transition period for the changes to PTE 2020-02 and PTE 844. It is highly anticipated that this new rule will face significant court challenges and delays based on the fact that the standard itself is so similar to the Obama-era rule. For now, firms should pay attention to the terms of the final rule and take steps to avoid running afoul of the new requirements.

Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.