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You and the DOL Fiduciary Rule

Whether you are involved in the financial industry as a broker or adviser or are an investor who is to be protected by the new rule, there are a few things to think about as you go forward. The implementation of a fiduciary rule is not new or news for registered investment advisers and their clients since the obligation to act as a fiduciary already exists. For brokers, however, the new standard is a big change in approach and requires attention.

Investors – clients of the advisers and brokers – do not always understand the difference between the nature of the adviser and broker but are intended to benefit from the rule since the same standard will apply to certain investment decisions no matter who provides the advice. The new rule requires that whomever is giving investment advice for retirement plan accounts (401k, 403b, IRA) must act in the best interest of the client. That sounds good but in practice may prove challenging for all.

Some industry speakers (not necessarily experts, of course) have opined that the new rule may mean that investors as clients cannot be advised to roll over a 401k or other similar account to a IRA since an adviser or broker would be paid on the IRA but not on the 401k. It seems likely that many regulators will go along.

However, there may well be cases where a client will benefit and want such a rollover for several reasons. One is the nature of the investment choices available through the 401k or other retirement plan. Although often broadly defined and including low cost options, such plans almost certainly will not provide some desired options such as certain socially sensitive investments, commodities such as gold, or other more unusual choices only available through an IRA. Even with full disclosure of any benefit to the adviser or broker in the rollover, a client may perceive the benefit of these other choices as being more important if not outweighing the compensation that adviser or broker may receive.

A rollover may not provide the undesirable benefit of paying more to an adviser or broker and so not be in violation of the new rule where the client is paying separately for advice and planning quite apart from simply investment recommendations. The costs to the client that are paid to the adviser or broker may not change at all, even with a rollover out of a 401k type plan.

These are just two of several possible approaches that do not implicate the new rule. There are certainly others and no doubt the financial industry will create some more. The key for both client and adviser/broker will be full disclosure and documentation as well as understanding and a clear acceptance of the advice. This should satisfy the rule as well as those actually involved in the transaction.


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