What is it and Why Should You Care?


You may have heard about the Department of Labor’s new Fiduciary rules that partially took effect on June 9, 2017. These new rules were originally supposed to be implemented in April, but the new administration requested a 60 day delay to hear more commentary before being put into force. This isn’t intended to be an editorial on the rule, but an explanation of what it is, why it was created, and how it might change the way we are able to help our clients in the future.

The Financial Advisor Rules I Operate Under

As many of you know, I have operated under the SEC’s Fiduciary standard for many years. By doing that, I am able to provide holistic advice and help you coordinate your overall planning in many areas, including estate and succession planning, tax diversification, lifestyle, investment, income planning and risk management. This is why we now have clients sign our Financial Advisory agreement and provide them with a copy of our ADV Part 2. This change was adopted voluntarily by us and was a choice to reinforce our philosophy of putting our client’s interests first. So before June 9, you had 2 kinds of advisers to work with, one who operates as a Fiduciary and those who were operating under the suitability standard. The suitability standard says that an investment recommendation has to be “suitable” for an investor similar to you. Those advisers could only give investment advice and provided that advice based on a factfinder and a “risk tolerance” questionnaire to determine appropriate recommendations.

You might be asking, “so what” and “what changed?”

What changed is that now, anyone giving you advice in regard to a “qualified retirement” account is governed by a newly created fiduciary standard. While the regulation of Registered Investment Advisers (RIA’s) and affiliated Investment Advisory Representatives (IAR’s) operating as Fiduciaries have been regulated by the Securities and Exchange Commission (SEC), this rule was written by the Department of Labor (DOL). That is why it only applies to investments in qualified retirement accounts including: IRA’s, SEP’s, 401k’s, Profit Sharing Plans, money purchase plans and other accounts that are designated as tax advantaged retirement savings plans.

Now, any adviser that helps you with one of these will have to disclose additional information to you about the investment, but mainly about how and how much they get paid if you make that investment. This does not apply to regular stock and mutual fund accounts. It also opens the adviser and the financial institution who created the investment account to future class action lawsuits as the primary regulatory enforcement regimen.

Simply put, this rule was written with a lot of input from the class action attorney lobby and according to analysis by Morningstar will add $70-$150 million in litigation costs in addition to $1.5 BILLION it will cost to administer this rule annually!

How Does This New Rule Affect You Directly?

  1. You will probably be paying more for investing. The costs I mentioned above will likely get passed on to the consumer.
  2. Many financial institutions have already said they will limit or suspend any sales of their products for retirement accounts. The future liability risk is just too high.
  3. It will prevent many middle income folks from accessing any individual help with making investment decisions. I am currently reevaluating how we will be able to provide advice going forward, and how much we will charge for that advice in order to avoid future lawsuits. Since all advisers are facing these same choices, I am afraid that many people likely won’t be able to afford working with a financial adviser as a result of this.
  4. Many employers simply will discontinue their sponsorship of retirement savings plans like 401k, TSA, SIMPLE, SEP and profit sharing plans to avoid liabilities and lawsuits that they are now going to be exposed to.

Just to make all of this even more confusing, it all could change in the next few months, because only some of the new rule was implemented on June 9. The rest is “scheduled” to begin on 1/1/2018.

However, the DOL has put out a request for commentary and the new Secretary of Labor has said that he will review the balance of the rules to determine if they are workable in the marketplace. He has said he might make changes if he feels that they aren’t workable. At Gainer Financial we are preparing to comply with those rules as they currently stand, but we also understand that we may have to adapt to different rules in a very small time frame.

I am now regulated by two competing fiduciary standards and one of them is likely to change before it is implemented, but we still have to prepare systems and routines to comply with it as it currently stands, while knowing that the current rules are probably going to change!

We’re Here to Help and Advise

I am all for a comprehensive fiduciary standard that covers everyone in the industry, I think it is essential and is why I made the personal choice years ago. I just want it to be clear, comprehensive and practical. There will be much more to this story as it unfolds over the coming months and I will revisit this once we have some more clarity as to how the final rules will guide us going forward. Until then, I will continue to operate under the SEC standard, which seems to be more comprehensive. There are some new forms to fill out when we consider any investments in an IRA or other qualified retirement options. As always, if you have any questions or concerns, please contact us, we are here to help!