“Today I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.” –President Barack Obama
A very simple principle indeed! More than five years in the making and a new standard that has the industry in a frenzy - So why is the DOL so involved with fiduciary standard? To put it in simple terms, the Department of Labor has set this rule in motion to protect investors from backdoor payments and hidden fees in retirement advice. Awesome!
Previously, the retirement advice rule has allowed some brokers and advisers to recommend products that put their own gain ahead of their clients’, resulting in investor losses of about $17 billion per year.
The DOL fact sheet explains “to demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.”
These standards haven’t been changed since 1975. So 41 years ago there were no 401K plans and fiduciary standards are long overdue. Today, people are more dependent on retirement plans than they used to be so the demand for the Department of Labor to regulate in favor of the investor is higher than ever.
Conflicts of interest can seriously impact your retirement so receiving advice that's in your best interest is seriously important for the outcome of your savings.
It’s also worth it to note that the DOL isn’t completely eliminating the commission that brokers receive from products; the rule requires the advisor and the investor to sign a B-I-C-E, Best Interest Contract Exemption, if the broker or advisor is still going to receive commission. The BICE contract must contain specific terms including:
- acknowledgement of the advisor’s and the financial institution’s fiduciary duty to the investor
- disclosure of compensation and other fee information
- a warranty that neither the advisor nor the financial institution will make any misleading statements about information pertinent to a transaction (including on such issues as fees, assets, conflicts of interest)
- a list of the steps the advisor/financial institution will take to mitigate potential conflicts of interest.
The industry is reeling at this contract, saying that the BICE is "burdensome and expensive", but that can easily be challenged. Just think: If a doctor only received payment on the medication prescribed, one would be a little apprehensive to accept that medical care. Or it can be compared to the food industry not wanting to disclose everything on food labels. As a consumer, it’s important to question, 'Why they wouldn’t want to do that?' and 'What doesn’t the industry want you to know about?'
The Department of Labor is in the red zone and about to score on this fiduciary ruling. The proposal is in it’s final stages and will almost inevitably be in effect in the coming years.
As a broker, you should start to prepare yourself for the implications this rule could have on your practice. There are tons of business models to choose from! The new ruling will give advisors the opportunity to own and operate a less restrictive business. There's a myriad of ways to structure your fees and implement compliance procedures that we can help you get acquainted with- so why stick to old ones that you'll be required to change soon?