One vital aspect of the upcoming requirements to act in the best interests of a client is to know when an advisor actually has a fiduciary obligation. A notable distinction of the rules is that their applicability is based on whether advice is provided to a retirement investor, not based on what type of product it is.

Historically, while the sale of securities products was regulated by FINRA, the sale of insurance products was subject to state insurance regulators and investment advice was regulated by the SEC and/or state securities regulators, the Department of Labor fiduciary rules cut across all of these product silos for retirement accounts.

As a result, the new requirements will apply to anyone who provides a recommendation about whether to rollover an IRA, or about how those IRA assets should be invested.


This means all the fiduciary requirements, including the disclosure provisions and the requirements about appropriate illustrations that are not misleading, will apply not just to traditional investment products, but also annuity products sold within retirement accounts – specifically, variable annuities and equity-indexed annuities, which the Department of Labor notes are complex enough to merit such scrutiny and be subjected to the best interest contract requirements. This means brokers and insurance agents selling annuities in retirement accounts will be treated as fiduciaries for the first time, so no more inappropriate claims of “no-cost” equity-indexed annuities paying big commissions under the table!

Fixed-rate annuities, however, will be eligible for a less stringent (but updated) Prohibited Transaction Exemption 84-24, and not need to comply with the full best interest contract obligations.

Even as of the April 10, 2017, applicability date, advisors who give advice to retirement investors will be subject to the fiduciary obligation, but the detailed policies, procedures and related requirements of the best interest contract obligation – as well as enforcement – will be delayed until Jan. 1, 2018, to allow for a transition period.

In practice, this means that advisory firms of all types have a year to figure out when or whether they are providing fiduciary advice to retirement investors and to make adjustments to their compensation and systems. (Notably, this may disrupt some relatively common but controversial practices of RIAs, such as charging different levels of AUM fees for bonds versus stocks, which under the new rules would disqualify the firm from being a level-fee fiduciary, and possibly be ineligible for the best interest contract exemption altogether due to the conflicted compensation.


Advisory firms should recognize that whether they must complete best interest contract agreements or operate as level-fee fiduciaries, they will need to adopt a new level of scrutiny to substantiate any rollover recommendation they make, along with any recommendations to transition to a fee-based account from a commission-based account after the April 10, 2017, applicability date. This is a new level of documentation that most advisory firms are not accustomed to. While most may simply find this a minor paperwork speedbump, in some cases it may force firms to really evaluate whether their advice and value-add is sufficient to truly justify a recommendation to roll over retirement assets from an existing 401(k) plan.

In the meantime, arguably the greatest adjustment pressure will be on annuity companies and broker-dealer and insurance firms that will not likely qualify for the level-fee fiduciary exception, and thus must not only engage in best interests contract agreements with clients, but institute the new requirement for policies and procedures to both disclose and then manage and minimize any conflicts of interest.

In the long run, this will arguably be the largest adjustment to the fiduciary rule, impacting not merely the brokers and insurance agents – including potentially how they’re compensated, as differential compensation and sales incentives are eliminated – but the processes and procedures and even business models of the companies themselves. Not because the DoL mandated which types of compensation or products can stay or go, but because the firms will now be cognizant that if they cannot defend their processes and procedures to the DoL – and the outcomes to a court in a future class-action lawsuit – that failure to effectively comply with the rule could mean a fiduciary breach that could damage or put a firm out of business.

Ultimately, the interpretations of the rule will likely continue for months, and given the delayed applicability date and the subsequent transition period, it will be years, potentially, before the full impact of the rules are felt.


A thorough reading of the 1,000-plus pages of the rule and its supporting materials reveals that as long as the core of the regulation remains intact – that institutions must disclose all of their compensation and material conflicts of interest, that advisors must affirm their fiduciary duty, and that institutions that offer conflicted advice must forever leave the door open to a future class-action lawsuit – most of the points that the DoL conceded and left out of the final rules weren’t much of a concession at all.

Fiduciary critics have lamented that the rule reduced the depth of up-front disclosures, allowed the best interest contract to simply be incorporated into advisory and new account agreements, and eliminated the restricted asset list, leaving the door open to controversial illiquid products like high-fee and illiquid nontraded REITs; high-commission products like some variable and equity-indexed annuities; and other proprietary products. But instead of regulating against those products, the DoL will presumably force the issue into the courts through class-action lawsuits and let future judges sort out what’s allowed and what isn’t.

This is arguably the whole point of principles-based fiduciary regulation – not to prescribe a never-ending series of precisely written regulatory rules, which just invite industry participants to push to the very limits of the line without putting a toe over. Instead, it creates the kind of principles-based guidance with a level of ambiguity that forces firms to shift their culture for fear of being found guilty after the fact, coupled with the outright banning of some problematic behaviors, such as eliminating sales contests and forcing others, like under-the-table revenue sharing agreements, into the light of day.

The DoL has essentially said to the financial services industry: “You claim that you can still offer illiquid, commission-based, proprietary products to consumers while also receiving revenue-sharing agreements, and simultaneously still act in the client’s best interests as a fiduciary? Fine. You can prove it to the judge when the time comes.”


When the time comes in a few years, we’ll see what happens. I suspect many institutions, faced with the possibility of losing a very expensive and high-profile class-action lawsuit, will feel compelled to take it upon themselves to amend their business practices to avoid the risk of putting themselves out of business. Alternatively, they may decide it’s easier to become a level-fee fiduciary because there’s less ambiguity and legal danger to executing on a simpler and less-conflicted business model. And I suspect that is exactly what the regulators at the Labor Department wanted to see happen in the first place.

In the meantime, it seems likely the DoL’s actions will ultimately force the SEC to act, as well, since we now have what seems to be an untenable conflict in which an investor’s retirement account is subject to a higher standard and a greater level of scrutiny than his brokerage account and other non-qualified assets.

On the plus side, by the time the SEC gets around to acting, the DoL rule may already be fully implemented and in force, in which case the SEC will get the political cover it needs to finally step up with its own rules, if only to conform. And that means by 2019 or 2020, the wealth management industry would have a fiduciary standard for all investment advice.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access