At long last, the controversial "fiduciary rule" for retirement accounts has been approved, with some modifications, by the Department of Labor (DOL).
The fiduciary rule drew a firestorm of criticism when it was first proposed in 2015. After lengthy hearings and thousands of comment letters from the public, the DOL went back to the drawing board. The final rule that has emerged takes into account some concerns that were raised, but keeps the basic framework intact.
Under the final rule, firms providing investment advice pertaining to retirement plans and IRAs must put their clients' "best interest" before their own. Essentially, financial advisors can't receive compensation without qualifying under the Best Interest Contract Exemption (BICE). Otherwise, their actions may constitute "prohibited transactions."
The new final rule clarifies the rules for the BICE by establishing a contractual fiduciary duty between investors and financial advisors. To qualify under the BICE, fiduciary standards of conduct must be acknowledged in a written contract.
In that contract, advisors must state that the advice they offer is based on a client's particular needs. This includes recommendations relating to a retirement plan, a plan participant or beneficiary, a plan fiduciary, or an IRA owner in exchange for fees or other compensation—for buying, holding, selling, or exchanging investments. It also covers advice on rollovers, transfers, and distributions from plans and IRAs. The fiduciary standards also cover disclosures on reasonable compensation, costs of providing advice to clients, and conflicts of interests.
The final rule also establishes what is not advice for these purposes. General communications such as financial newsletters, marketing materials, and educational materials don't count.
A main difference between the final rule and the earlier proposed version is that additional financial products, including variable annuities and private placements, are now included under the BICE. The final rule also eliminates a requirement for financial advisors to give clients an annual transaction disclosure on costs. Another key change wipes out the need for advisors to provide regular projections of fees over one, five, and 10 years.
Finally, the process of implementing the BICE is streamlined. Now a contract can be completed when a client opens an account.
For most advisors and clients, the final rule takes effect on April 10, 2017, although in some cases the effective date will be January 1, 2018. More details will be forthcoming.