Banking & Finance

Fiduciary rule closes some conflict-of-interest loopholes

DOL regulation requires investment advisers to act in clients’ best interests, not their own.

February 16, 2018
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Is your financial adviser working in your best interests?

He or she is now, based on the U.S. Department of Labor’s implementation of the “fiduciary rule” last June.

DOL’s ruling closes some “loopholes” in previous legislation while requiring that investment advisers — accountants, brokers and financial planners — become fiduciaries who are now responsible to provide retirement advice in the best interest of their clients.

Although many assume the primary goal of an investment adviser is to provide the best advice for their clients, the Employee Retirement Income Security Act of 1974 (ERISA) contained loopholes that allowed some financial advisers to advise in their own best interests rather than their clients.

According to the DOL’s Employee Benefits Security Administration (EBSA), the previous regulation became law at a time when there weren’t 401(k) plans, individual retirement accounts (IRA) or rollover of plan assets from ERISA-protected plans to IRAs.

In short, EBSA allowed advisers who were not fiduciaries to “not disclose and have limited liability under federal pension law for any harms resulting from the advice they provide.”

Nonfiduciaries could give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries, which was stated in the original final rule by the EBSA.

Now, ERISA replaced those rules with the fiduciary rule, which is aimed at erasing the risk of conflict of interest so advisers can better serve their clients.

Michael Markey, an investment adviser at Kentwood-based Legacy Financial Network, said the new rule will hold the firm, not the adviser, liable for monetary penalties when an adviser is in-violation of their fiduciary responsibilities.

“This is leading toward custodians offering fewer funds and investment choices to clients,” Markey said. “It will be easier for the firms to monitor client-orientated processes with fewer choices available to the adviser. It's easier to say the adviser did not have a conflict of interest when the adviser only has three choices to offer clients rather than 300.

“The problem with this is that the three choices could all be very poor choices, but the conflict of interest is removed since the rule stipulates an adviser, essentially, can only be conflicted with offering what he or she has available within their product offerings.”

To limit the risk of fiduciaries' liability, the U.S. Securities and Exchange Commission announced Feb. 12 a Share Class Selection Disclosure Initiative. The initiative encourages fiduciaries to disclose any conflicts of interest.

According to the SEC, a conflict of interest may emerge when an adviser receives compensation (either directly or indirectly through an affiliated broker-dealer) for selecting a more expensive mutual fund share class for a client when a less expensive share class for the same fund is available and appropriate. The SEC said that conflict of interest must be reported.

All investment advisers have until July 2019 to fully implement the fiduciary rule.

Philip Streng, a financial adviser for Edward Jones in Grand Rapids, said it won’t take his company that long.

He said even before the fiduciary rule was enacted, it was a “common rule” at his firm that all advisers put their clients first.

“I can only speak about my experience of 21 years at Edward Jones, we’ve always put our clients’ best interests first,” Streng said. “That is a staple of our firm. Now, I would say the Department of Labor is formally establishing this rule and with that there is a certain expectation of a documentation process that was not in place for most of the industry prior to that.”

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