Are You Ready for the DOL’s Conflicts of Interest Rule?

By Brian Martucci
Wed, 2017-02-01 14:45

The next Minnesota Business Executive Forum is all about conflicts of interest – specifically, the Department of Labor’s new “conflicts of interest in retirement advice” rule, a long-awaited update to ERISA. Unless it’s halted by a last-minute edict from the new administration, the rule is slated to go into effect on April 10. 

“No one knows for sure” if or how the rule will change under the new administration, says Brian Bergmann, managing director at CBIZ MHM’s Minneapolis office. “I do believe the intent of the law changes are good, and I and many others do not believe we will go back to the old laws.”

The DOL’s move, which has been broadly interpreted as client-friendly, aims to redress the longstanding “misalignment” between non-fiduciary investment advisors and their clients. In an announcement explaining the changes, the DOL said:

“Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers' interests and often create strong incentives to steer customers into particular investment products. These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results, often after rollovers out of ERISA-protected plans and into IRAs.”

Basically, the rule greatly expands the cohort of advisors and plan administrators required to act as fiduciaries – those sworn to act in their clients’ best financial interests. Advisors and plan managers acting as fiduciaries must put their clients’ needs before their own, and aren’t allowed to steer clients into specific funds or other investment products simply to chase commissions or 12(b)-1 fees.

By contrast, non-fiduciary advisors and managers are permitted to follow the “suitability” standard, a much looser regime that gives advisors broad latitude to look after their own interests provided they don’t clearly contravene clients’ overarching strategy, goals, and risk tolerance.

Many professional observers (and plenty of retail investors) have asked why it took more than 40 years to change this suboptimal (for investors, at least) dynamic. That’s a reasonable question.

But even fair and sensible changes can be complicated to implement – especially for plan sponsors and investment advisors, many of whom built their businesses around the old way of doing things. Being a fiduciary, it turns out, is hard work.

And the changes affect a lot of people directly. “Anyone who sponsors, provides investment advice or is otherwise involved in the administration of and employee retirement plan is affected by [the rule],” says Bergmann.

It’s therefore no surprise that the financial community isn’t completely united in support of the DOL’s rule.

That doesn’t mean the advisor community is united in its support of the rule. “The rule has caused a lot of additional up-from and ongoing expense, so some adjustment would be welcomed by the investment industry,” says Swanson. “The strongest argument against the rule is it will be harder for advisors to provide advice to “smaller” clients – the increased workload to comply with the regulation will compete for advisors’ time.”

Learn more about how to prepare for these changes – and how the financial community feels about them – at our February Executive Forum, slated for 4pm, February 8, at the James J. Hill Center in St. Paul.