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In early April, the Department of Labor issued its long-awaited final rules for financial advisors handling retirement accounts. And you don't have to work for a large investor for the rules to affect you. We all, after all, have a 401(k) or IRA. And now the rules governing how advisors handle those accounts -- worth trillions of dollars -- are a bit more complicated.
Here's what you need to know.
For the first time, the DOL's rules for retirement financial advisors have imposed a fiduciary standard. Prior to the rules, brokers were required to recommend only "suitable" investments. That meant that a broker could recommend more expensive investments, which would provide a higher commission to the broker, when identical, cheaper alternatives were available. Those conflicts of interest ended up costing Americans about $17 billion a year, according to the Obama administration.
Under the new rules, advisors will now have to put their client's best interests before their own. "The marketing material that I see from many firms is, 'We put our customers first,'" Secretary of Labor Thomas E. Perez, told The New York Times. "This is no longer a marketing slogan. It's the law."
The most important change is the conflicts of interest rule. Financial advisors and institutions must not receive third party payments that create conflicts of interest. In practice, that means firms can't set their own compensation structures with third parties, unless they qualify for the Best Interest Contract Exemption, or BICE. If an advisor wants to receive otherwise prohibited compensation from third parties, they must meet protective conditions intended to safeguard the interests of retirement plans, participants, and beneficiaries.
To qualify under the BICE, advisors must acknowledge, in a written agreement with the client, their fiduciary status. The fiduciary standard governs investment advice, compensation standards, disclosure of the cost of advice and disclosure about conflicts of interest.
The rule applies to all communications that constitute "fiduciary investment advice." That includes recommendations for a fee or compensation (direct or indirect) as to the advisability of buying, holding, selling, or exchange securities or investment properties. It also includes recommendations on rollovers, transfers, and distributions. It does not, however, include general communications, like marketing materials and basic investment education.
The new rule is set to take effect in April of next rule, with full implementation in January, 2018. In the meantime, the financial services industry has been highly critical, arguing that the new, increasingly complex rules will force them to drop less-affluent clients. Litigation is expected before the full rule takes effect.
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.