At the urging of the White House, the Department of Labor finally released the updated fiduciary rule language last Wednesday. Since then, investment advisers, broker / dealers, insurance companies, fiduciary consultants, and attorneys have been poring through the 100 page document trying to figure out what it all means for their business.
First, here is the official version of what’s in the document according to the White House and the Department of Labor, respectively:
The White House
Department of Labor
Second, let’s consider the full version. The reality is that there are wide reaching implications including the prudent investment process (including UPIA-like standards on portfolio management), due diligence liability migrating up the broker/dealer level, determining reasonability of fee based on fee-types (level fee or commission based fees), exceptions based on the new “Best Interest Contract Exemption”, carve outs for existing business models on alternative assets or proprietary funds, limitations on a disclosure’s ability to divest a conflict of interest, etcetera. Truthfully, I’ve already listened to two analyses of the new DOL ruling (and I have another conference call scheduled for tomorrow) and there has been a surprising lack of overlap between key topics and emphasis. Besides, until some of these principles are tested in class actions by states OR until the DOL provides more guidance on how to interpret the ruling, there is still some wiggle room. In other words, the full reality isn’t knowable yet.
Third, since it is complicated and nobody understands the nuances yet, let’s consider the practical version. I’m going to risk paraphrasing this really complicated document and summarize the new rule into a few sentences. Here is the practical version:
Investment advisors who work with retirement assets (like IRAs, 401(k) plans) were previously allowed to operate as salesmen, wherein they are able to work primarily for their own benefit. Under the new Rule, investment advisors who provide advice on how to invest retirement assets are now subject to the fiduciary standard, where they must act for the primary benefit of the asset owner. It will still probably be “business-as-usual” for existing investment advisers, but now the states and the IRS have the ability to sue advisers not acting in good faith, in accordance with the new standard.