Jun 12, 2017
Breaking Down the Fiduciary Rule
The Department of Labor’s definition of a fiduciary demands that advisors act in the best interests of their clients, and to put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. The definition has been expanded to include any professional making a recommendation or solicitation — and not simply giving ongoing advice. Previously, only advisors who were charging a fee for service (either hourly or as a percentage of account holdings) on retirement plans were considered fiduciaries.
Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts. "Suitability" meant that as long as an investment recommendation met a client's defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their client’s best interests first rather than simply finding “suitable” investments. The new rule could therefore eliminate many commission structures that govern the industry.
Advisors who wish to continue working on commission will need to
provide clients with a disclosure agreement, called a Best Interest
Contract Exemption (BICE), in circumstances where a conflict of
interest could exist (such as, the advisor receiving a higher
commission or special bonus for selling a certain product). This is
to guarantee that the advisor is working unconditionally in the
best interest of the client. All compensation that is paid to the
fiduciary must be clearly spelled out as well.