Lenders, it’s time to embrace a new definition of “fiduciary.” In 2016, the U.S. Department of Labor (“DOL”) released the final Fiduciary Rule to expand the definition of “fiduciary” for purposes of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code. The rule was delayed by the Trump administration, and following review of nearly 200,000 comments, the DOL designated June 9, 2017, as the official start date of the new rule for the financial services industry. Lenders everywhere must be ready to comply.
As a result of the old rule’s strict five-part test, large numbers of investment professionals, consultants, and advisers had no obligation to adhere to ERISA’s fiduciary standards or the prohibited transaction rules. The new Fiduciary Rule effectively reshapes the definition of “fiduciary” in a manner that will heavily impact the ability of banks to market and deliver wealth management products. In its most basic form, the Fiduciary Rule requires individuals who advise consumers on retirement accounts to provide impartial advice and refrain from accepting payments that represent a conflict of interest. Advisers as fiduciaries must act solely in the best interests of their clients. However, there is an exemption (the “Best Interest Contract Exemption”) that allows financial advisers and the adviser’s employing firm to accept commissions and engage in revenue sharing as long as they put the client’s best interests first when advising the client on investment recommendations, disclose all fees and conflicts, and ensure that the compensation received is reasonable.
Lenders will be focusing on two key areas: how to avoid triggering fiduciary status when possible, and how to comply with the Fiduciary Rule when it can’t be avoided. They should be aware of these key items when the Rule is effective:
- Advising clients on whether to roll over assets from a 401(k) into an IRA will be considered investment advice, triggering the Fiduciary Rule’s provisions and establishing the adviser and the adviser’s firm as a fiduciary under ERISA. Counseling where, how much, what form, or even whether to distribute funds is also considered investment advice. These recommendations must be in the best interest of the investor.
- Bonuses, awards, and other incentives to spur the sales of certain investments will likely need to be eliminated to comply with the impartiality standards included with the exemptions.
- Certain activities to educate plan participants on investments are not considered fiduciary advice if, among other items, the educational materials provide all the investment options available and don’t promote specific investment options over others.
- IRAs and other non-ERISA plans are not subject to the Fiduciary Rule, so best practices dictate that fiduciary conduct standards be spelled out in an enforceable contract between the investor and the financial institution.
The rule’s impact may be as much about compliance costs as it is about restructuring institutional behavior, but the world of marketing and providing investment services is about to undergo a sea change. If lenders haven’t already done so, now is the time for a compliance audit with a third party who understands the Fiduciary Rule and its application. The Fiduciary Rule is here to stay.