A casual reading of any financial publication recently is certain to find a headline featuring three letters: D–O–L. What they are referring to is the U. S. Department of Labor Conflict of Interest Rule, popularly referred to as the “Fiduciary Rule.”
The culmination of a long tussle between regulators and professional advisers who engage in retirement planning, the final version has seemingly not satisfied either camp. Nonetheless, the most concerned — financial advisers and the companies they represent — will do what is needed to adapt while some final maneuverings remain.
The amount of investor assets accumulated in retirement plans is significant — $6 trillion, according to a recent Cerulli & Associates post. Add another $3 trillion in IRAs and that’s a total of $9 trillion. Sounds like a lot, but when spread over the 245 million adult Americans, it is a less than impressive $36,750 per capita. Such a large market is certain to garner attention and with that attention comes a certain amount of noise. And with noise comes confusion.
The final rule, as published, is 1,023 pages. Overall, it broadens the definition of a fiduciary to anyone who receives direct or indirect compensation for providing advice to retirement plans, plan participants or beneficiaries and IRA owners. Advice is characterized as a recommendation intended to result in action.
Sounds pretty simple, until applied to the real world. What’s the difference between telling a friend, “I like the meatloaf at Sal’s Diner” and “Try the meatloaf at Sal’s Diner“? According to the DOL, if it’s the latter and Sal decides to reward me with extra mashed potatoes, then I’m a fiduciary. That might seem insignificant, until the friend at Sal’s gets sick — supposedly from the meatloaf — and decides to sue me. Recommendation is a broad term, wide open for interpretation.
ISSUE 1 — STANDARDS ARE NOT OBJECTIVE. The DOL has established a set of fiduciary standards seemingly general in nature. The broadest definition is around fees, which must be “reasonable.” Which brings to mind a favorite quote: “Fees are only a problem in the absence of value.” No concept is more subjective than value.
ISSUE 2 — DOL IS NOT A REGULATORY BODY. The new rule does not establish any penalties or remedies. As a cabinet level of the executive branch, the Department of Labor’s prescribed remedy is litigation, leaving more than 1,000 pages of regulation open to interpretation. Quite a field day for someone who fails to see “value” for the fee paid.
ISSUE 3 — EXPANSION INTO THE IRA WORLD. It used to be a clear and simple division. Regulations for IRAs were separate from those of qualified plans. Once an individual chose to roll their retirement funds from an employer-sponsored plan to their own individual retirement account, they were on their own. They could handle their assets as they desired, on their own or with the assistance of a financial adviser. But after the DOL fiduciary rule, IRAs are now subject to the same rules as qualified plans.
ISSUE 4 — METHOD OF COMPENSATION. Perhaps the most interesting stance taken by the DOL is about compensation and how advisers are remunerated. And that debate over contingent compensation versus flat management fee has been gathering steam within the financial world.
The math is relatively simple: pay 3.5 percent up-front once or .75 percent level. Hold the asset for five years or longer and the former generates a lower number. This issue has been and continues to be hashed out between advisers and clients with each transaction. The new DOL fiduciary rule takes a bold stance and ends the debate, establishing hurdles and barriers in the form of something called the Best Interest Contract Exemption (BICE).
What will it all mean to the consumer?
Sadly, confusion could be the greatest byproduct of all. In large part this is due to the broad and somewhat general nature of the rule. Attend any seminar or read the dozens of articles that appear daily in financial journals on this topic and lack of certainty will be on display among the people charged with enacting this rule.
Anthony Domino Jr. is managing principal of Associated Benefit Consultants LLC, an employee benefit and personal planning firm in Rye Brook. He can be reached at or 914-288-8882.