Broker Check

Department of Labor Issues New Fiduciary Regulations - What does it mean?

| June 21, 2017
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On April 6th the Department of Labor (DOL) issued new rules regarding who in the financial services industry is considered a fiduciary. These new rules were years in the making and caused a some financial firms to dig their heals in as they fought the new rules while others embraced them and started to rethink how they provide advice to their clients.

Let's start with the original definition of a fiduciary adviser, this has more or less been the definition since the original fiduciary rule was adopted in 1975. According to the original DOL definition, a fiduciary adviser was defined as a person/firm who met the following three criteria;

  1. Renders investment advice
  2. Receives compensation, direct or indirect
  3. Advice is individualized
    The new DOL rules have added the below new criteria in order to narrow the statutory definition;
  4. Advice is provided on a regular basis
  5. Advice provided serves as primary basis for decision-making

To provide some context as to why the DOL was considering strengthening the fiduciary adviser rules, it released the following statement as part of its Notice of Rulemaking in April of 2015: "Instead of ensuring that trusted advisers give prudent and unbiased advice in accordance with fiduciary norms, the current regulation erects a multi-part series of technical impediments to fiduciary responsibility." In my opinion, what this means is the DOL held that investment advice rendered without fiduciary accountability was not consistent with legislative intent and was harmful to investors.

So what is investment advice? Generally speaking, investment advice is any recommendation as to the advisability of acquiring, holding, disposing of, or exchanging securities or other investment property or any recommendation as to management of securities or other investment property. Investment advice involves a call to action specific to a plan participant or IRA owner, which gives rise to fiduciary accountability. General financial topic education and other communications without a call to action are considered non-fiduciary and typically do not result in fiduciary responsibility.

So who is considered a fiduciary investment adviser? Under the new DOL regulations a fiduciary investment adviser is a paid person(s) who provide, directly or indirectly, investment advice that either represents/acknowledges acting as a fiduciary or is pursuant to an agreement, arrangement or understanding that is individualized or pertains to the advisability of particular investment or management decisions regarding qualified plan assets or IRA investment assets.

The types of "management" advice that could fall under this definition include, but are not limited to; investment policy statements and/or strategies, advice about portfolio composition, selection of other investment advisors or managers, selection of account arrangements (broker or adviser of record), or advice about plan or IRA rollovers such as whether to do so, in what amount, in what form and to what destination.

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