Fiduciary Resources

Five Things You Need to Know About the DOL Rule

By Leila Martin

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How well do you understand the Department of Labor’s fiduciary rule change and what it means for your advising operation and business? Here are five things you need to know right now.

How the Department of Labor Rule Change Affects Your Business

The biggest changes you’re likely to see are around compensation, compliance, fees, and paperwork.

“Generally what we’re going to see happen,” said Jason Smith, founder and CEO of the Clarity2Prosperity Mastermind Group of advisors,“ is commissions go down on a lot of products [and] you’re absolutely going to see bonuses go away based on the amount of a certain product or company that you sell.”

Remember that the purpose of this rule change is to eliminate conflicts of interest such as incentives for advisors to sell certain products over others, based on which will net the highest payout to the advisor.

Beyond that, you’re looking at increased costs for the enhanced reporting, disclosure, and recordkeeping your business will need in order to stay compliant with the rule.1 So you should expect to do some extra paperwork. Anyone giving financial advice will need to “have policies and procedures in place designed to mitigate harmful impacts of conflicts of interest,”2 according to the department’s explanation of the new regulations.

You’ll also be expected to disclose at least basic information about your business’s possible conflicts of interest and all the costs associated with your advice – including any fees that may have gone undisclosed in the past.

General communications and educational materials aren’t affected by the new rule. But to avoid being considered investment advice they may need new disclosures, so you should be ready to spend some time going through your suite of materials and making revisions as necessary.

The DOL predicts that broker-dealers and insurers will feel the brunt of these changes, while registered investment advisors and other ERISA fiduciary service providers are expected to have it a little easier.

If you’re among the advisors who will be more affected by the rule change, your business will also likely face adjustments in terms of the compensation you receive. It’s anticipated that many advisors will move to level commission and fee-based compensation models in order to eliminate or mitigate potential conflicts.3

 (Related: MassMutual Fiduciary Checklist)

When the DOL Fiduciary Rule Change Occurs

Firms will likely phase in compliance with the rule over the next several months, although various regulatory and legal proceedings still have the potential to alter the timeline.

The original ruling stated that the updated definition of “fiduciary” would go into effect on on April 10, 2017, by which date your business would need to be compliant with the new fiduciary requirements for any qualifying transactions made. As a result of the delay proposed in March of 2017, the rule's applicability date has moved from April 10 to June 9, 2017.

Certain provisions of the Best Interest Contract Exemption (BIC/BICE) and the Principal Transactions Exemption – provisions that update rules for particular institutional and private inventory transactions – don’t take effect until January 1, 2018. The longer transition period for portions of these exemptions gives businesses and advisers “time to prepare for compliance with all the conditions of the exemptions while providing basic safeguards for the interests of retirement investors.”4

On or after January 1, 2018, all transactions must be fully compliant with every part of the rule, including the exemptions.

What the DOL Rule Covers

Essentially, the Department of Labor’s fiduciary rule change covers the investment recommendations you make and the compensation you receive for them.

The term “fiduciary” is redefined to include anyone giving investment recommendations to retirement plan sponsors, participants, and IRA investors, and fiduciaries are held to stricter standards when giving advice.

Under the revised rule, businesses and advisors considered fiduciaries will be legally required to:

  • Make investment recommendations that put the investors’ best interests first

  • Charge only reasonable compensation for advice

  • Make no misrepresentations to their customers regarding recommended investments

 Why the Rule is Changing

The Department of Labor’s updated fiduciary rule is designed to ensure that investors’ financial well-being is at the center of the advice they receive. According to the DOL, “while many advisers do act in their customers’ best interest, not everyone is legally obligated to do so and some do not.”

Current investor protections were put into effect when pension plans were king, and they don’t adequately cover self-directed investment vehicles like the 401(k) plans and IRAs used today. That protection gap has left holes that some advisors take advantage of according to the DOL. The new rule will legally obligate advisors to give investment advice designed to serve the investor’s best interests before their own.

Of course, while the same general rules will apply to everyone, each firm will determine its own way to address these changes, so advisors associated with firms should look to their leaders for specific direction.

To learn more about the rule change, take a look at the Department of Labor Fiduciary Fact Sheet.

Who the Rule Change Helps

The Department of Labor’s fiduciary rule change is being enacted to help investors by reducing the amount of retirement savings they lose to inappropriate investments and high fees – but it could be a blessing in disguise for the advisor community, too.

“This is,” said Jon Shuman, head of Worksite Sales & Distribution at MassMutual, “the biggest thing that’s happened in the business since ERISA. It’s a true opportunity and a push that financial professionals would never otherwise have to examine their model and decide exactly what they want their business to be.”

If you’re one of the many financial professionals who have been making recommendations with your clients’ best interests in mind all along, you’re already in a great position. You’ll probably still have increased paperwork and compliance costs as you keep up with the more formal documentation the Department of Labor will require, but you’re better off than your competition in terms of already running your business in a way that prioritizes your clients’ financial well-being above anything else.

But whether you’re ahead of the game or just catching up, there are things you can do to expand your business model and potentially grow your sales – and your competitive edge – even further.

One avenue you may want to look into is adding voluntary benefits to your suite of services. With workplaces moving more and more from employer-provided to employer-enabled benefits, employers are likely to want more information and help on how to structure their offering. They still want to attract and retain top talent, after all, and many of them don’t understand the brave new and ever-expanding world of voluntary benefits.

As a trusted financial advisor, you have the opportunity to add greater value than ever before if you can help your clients successfully navigate this new environment.

Smith asserts that when it comes to preparing for this change, it’s not something you should be waiting on – give yourself the time to make smart, strategic decisions. “At the end of the day, you need to get serious about getting yourself organized, analyzing [your business], and proactively having a plan. If your revenue is cut and your expenses increase, then what’s your strategy of where to make cuts in your business, and where can you proactively start creating additional revenue streams?”

And did you know that, according to a recent MassMutual study, advisors see about 90% of their new business as a result of referrals? That means that the more valuable you are to your current clients, the more likely they are to be highly satisfied with your work – and to pass on the word to their peers in the business community.

 

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The information provided is the opinion of MassMutual and is subject to change without notice. It is not to be construed as legal advice. Advisors must consult with their own firms for specific direction.

 

1,2 Department of Labor, “Fiduciary Fact Sheet”,  https://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html

3 MassMutual, “An Overview of the Department of Labor’s New Fiduciary Rule”, http://www.massmutualatwork.com/media/1108/sponsor-dol-rule-flyer-final.pdf

4 Department of Labor, “Fiduciary Fact Sheet”,  https://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html

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