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The New DOL Fiduciary Rule for Brokers

In the news for some time, the long-awaited Department of Labor proposal concerning the duty of brokers to clients with respect to retirement investing has been released for comment. The centerpiece of the proposal is a requirement that brokers place a client’s best interest first in their advice on investments in qualified retirement plans, including IRAs. The best interest or fiduciary rule is quite different and more restrictive for brokers than the traditional suitability rules applied to them today. The proposal also reiterates that the best interest rule applies to registered investment advisers and their representatives as well as insurance agents selling retirement related products.

However, it is important to note that the best interests rule is limited to specific retirement investment advice and not necessarily applied to brokerage accounts or other investments advised upon by brokers.  There are other exceptions to the rule as well, including exempting brokers who simply take orders from a client to acquire specific investments where no advice is provided.

What is interesting about the government’s view of the proposal is the estimate that it will “save” investors billions of dollars each year once the rule is in force. Given trends in investing towards lower cost investments and the steady increase in the number of better designed and priced products offered by some insurance companies and brokerage firms, it seems likely that the savings may be somewhat lower than predicted.

Some of the opposition to this rule making has been based on the notion that many investors will no longer be served if the best interest rule is applied to brokers. In reality this argument seems more a fear of change on the part of brokers since, as almost any financial adviser knows, money may be earned from clients even if the advice must be in the clients’ best interest.  Maybe brokerage firms and insurance companies will need to expend more effort on designing better products and work harder for their clients.

The only real downside I can see to this rule is, not surprisingly, the increased control/interference by the government. An alarming postscript to the government proposal is the mention of the IRS imposing an excise tax on transactions deemed conflicted.  The folks who regulate brokers, insurance agents and advisers should be capable of punishing and/or penalizing activity deemed problematic without giving the IRS more work and more reach. More to the point, the materials do not make clear that the client investor is protected from that excise tax since the whole point of this proposal is to save investors money. We shall see.


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