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DOL Releases Conflict of Interest Rule

Over the past year, there has been increasing buzz in the financial industry surrounding new regulation from the Department of Labor (DOL). The “Conflict of Interest Rule” proposed by the DOL seeks to apply a “fiduciary standard” to any financial advisor who makes recommendations about clients’ retirement accounts. The ruling is expected to reshape the financial industry and drastically change the commission system that provides compensation for many advisors.

Background

The DOL originally proposed the Conflict of Interest Rule back in 2010; however, opposition to the rule was strong enough that it was defeated in 2011. In early 2015, the DOL and President Obama proposed the rule once again. After its initial proposal, the DOL accepted 3,000 external comments on the rule, using them to fine-tune the regulation and add necessary exceptions. On April 6, 2016, the rule was finalized and went to Congress for review; the financial industry has until January 1, 2018 to be in full compliance.

What the Rule Does

The Conflict of Interest Rule places a fiduciary standard on financial advisors receiving compensation for recommendations on a client’s IRA or 401(k) (as well as some other tax-deferred accounts).

For advisors that earn commission for recommendations for retirement accounts (i.e. not paid directly by clients), the rule requires the use of the “Best Interest Contract Exemption” (BICE). The BICE guarantees an advisor will work in a client’s best interest, disclose any conflicts of interest and provide compensation structures for the financial products they recommend.

Why the Rule was Created

The motivation behind the rule was to update the Employee Retirement Income Security Act of 1974 (ERISA), which guaranteed pension managers would act in the best interest of pensioned employees. Now that 401(k)s and IRAs have replaced pensions as the standard methods of funding retirement, the DOL wants to expand ERISA so that these new accounts receive the same fiduciary protection.

The DOL believes that the previous standards allowed for conflicts of interest among advisors who personally benefit from account recommendations. By holding these advisors to a fiduciary standard, the DOL aims to stop any unethical management of clients’ retirement accounts and guarantee the quality of all retirement investment advice.

Reactions

The Conflict of Interest Rule has received both praise and criticism from politicians, financial institutions and the general public. Opponents of the rule say it is unnecessary and wrongfully implies that commission-based advisors weren’t already serving clients’ interests; others have welcomed the proposal, saying it will help protect clients while officially giving advisors the credibility they deserve.

Several groups are seeking retraction or modification of the rule, which means it could undergo changes in the future. While it’s unknown what alterations will be made, the DOL clearly intends to shape a law that is focused on clients’ best interests.




 

This post is intended as a source of informative data for the benefit of RFM Financial Solutions’ clients and is not to be construed, by implication or otherwise, as an offer to sell or a solicitation to buy, sell, or trade in any commodities, securities, or other financial instruments discussed. The information provided herein is primarily obtained from public sources believed to be reliable but is not guaranteed and RFM Financial Solutions is not responsible for any damages or loss that may occur from taking action based on this information.

 
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