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What the New DOL Fiduciary Rule Means for Your Clients

Retirement savers get new protections as DOL extends fiduciary standard to IRAs.

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Fiduciary financial advisors have reason to celebrate a long-awaited change in the financial landscape. New regulations from the US Department of Labor extend fiduciary protections to IRAs, effective Sept. 23. This means even advisors who are not registered investment advisors must put their clients’ interests first when it comes to IRAs.

With more and more baby boomers retiring, there has been a huge flow of 401(k) rollovers into IRAs. This has presented a tremendous opportunity for advisors but has also opened the door for nonfiduciary advisors (like stockbrokers and insurance agents) to generate unreasonable commissions.

Until now, a gap existed in the protective regulations affecting individuals rolling their hard-earned retirement funds into IRAs. Although all advisors had to act in clients’ best interest for 401(k)s, only RIAs were held to Erisa’s fiduciary standard on IRAs (and other investment accounts). The new regulations require all advisors on IRAs to act in the best interest of their clients, not their own wallets.

New IRA Fiduciary Regulation an Important Change

Here’s what this means for you and your clients:

  • Enhanced Protection: Clients can now breathe a sigh of relief, knowing that their IRA advisor is legally obligated to act in their best interest. This means less worry about products recommended purely for higher commissions.
  • Increased Transparency: Advisors are now required to disclose potential conflicts of interest, such as receiving commissions for specific products. Additionally, advisors must ensure that their compensation is “reasonable.” For example, let’s say the advisor is considering proposing a rollover into an IRA product with a high expense ratio. Under the new regulations, the advisor cannot make the recommendation unless their compensation is reasonable. Further, the advisor is obligated to disclose the costs and how long-term returns might be affected.
  • A Level Playing Field: The new standard applies to all advisors, including stockbrokers and insurance agents as well as investment advisors. This should promote fair competition based on expertise and service and not incentivize sales with the juiciest commissions.

Retirement Dreams Need Protection

Are these regulations necessary? In my opinion, yes. For example, I was alerted to an inappropriate recommendation made to a friend just two weeks ago! My friend just retired, and her $1 million 401(k) was being rolled into an IRA. Her “advisor” recommended an immediate annuity paying out 5.5% a year for the rest of her life “to ensure she doesn’t run out of money.” I asked my friend if she would like to receive $55,000 a year for the rest of her life, with no increases for inflation or for market growth, while giving away her $1 million. She was horrified. She anticipated averaging greater than 5.5% annualized returns. This meant she could draw at least $55,000 a year without giving up her principal! Yet, absent talking to me, she would have gone along with her advisor’s suggestion. Had these new regulations been in place, my friend would not have had to face this potentially harmful advice.

Although these regulations should be universally applauded, some in the industry have expressed concerns. At a minimum, even RIA firms will be faced with increased compliance requirements. All firms need to adjust internal processes and implement new training programs. Of course, these changes will be much more cumbersome for non-RIA firms. Some advisors—especially those who are commission based—claim these changes could reduce the number of advisors willing to work with smaller accounts.

It’s true that change typically causes some degree of discomfort. But the ultimate goal is worth the pain: protecting clients’ retirement dreams.

Navigating the IRA Fiduciary Regulation

Here’s how advisors can navigate this change and even leverage it to their advantage:

  • Embrace the Fiduciary Spirit: Are you already operating with a client-first mentality? These new rules simply codify what you already do. If you are a commission-based advisor, it’s time to change your approach. All advisors will need to review existing procedures and ensure they meet the new standards.
  • Invest in Education: Be sure to provide yourself and your team with a thorough understanding of the new regulations. Consider industry resources and training programs offered by professional organizations or the Financial Industry Regulatory Authority.
  • Proactively Communicate: Discuss the changes with your clients and highlight how these enhanced protections benefit them. This will give your clients comfort and help cement your client relationships!

As they say, a rising tide lifts all boats. By embracing these regulations, we can help our clients build stronger retirement plans while uplifting the reputation and trust in our industry.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

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