Benefits and Compensation

DOL Fiduciary Proposal: Best-interest Broker Contract Planned

The U.S. Department of Labor on April 14 previewed proposed changes to the 40-year-old definition of “fiduciary” that the agency says will increase consumer protection for those seeking advice on retirement investments and 401(k) rollovers. The long-awaited changes will include a new contract for broker-dealers to sign that pledges they will “formally commit to their clients to put their best interest first.”

Labor Secretary Thomas Perez in a media telephone briefing introduced the changes as adding protection for American workers who today are often forced to make their own retirement investment decisions with the advent of defined contribution plans. The DOL’s effort to minimize brokers’ conflicts of interest arising from commissions earned by placing retirement funds in individual retirement accounts, and to hold more private-sector financial advisers to a fiduciary standard, has been in the works at DOL for about five years. The Securities and Exchange Commission is said to be preparing a similar standard.

The fiduciary standard has long applied to retirement plan advisers, but broker-dealers are held to a lower standard, called “suitability.” Critics say brokers who work on commissions often steer clients to the mutual funds that pay them the highest fees. In February, the White House joined DOL in urging greater protection for middle-class consumers seeking investment advice beyond their employer retirement plans.

Prohibited Transaction Exemptions

The labor secretary referred in the call to unspecified prohibited transaction exemptions as “guardrails” for consumers aimed at sheltering them from self-interested financial advice while allowing brokers to continue earning a living from such transactions. Perez stressed that the proposed rule, to be posted in the April 15 Federal Register, does not end broker commissions, apply to brokers who only take direct orders and do not offer financial advice or limit consumer financial education.

If financial professionals want to steer clients toward certain types of individual retirement accounts or tax-exempt investment vehicles, they would have to commit to the best-interest exemption in writing and notify DOL of the commitment. “This rule will simply codify what [financial professionals] say they are already doing,” Perez said, indicating that some investment advisers currently meet the proposed rule’s standards. The proposed rule intends to protect consumers from “hidden fees or back-door payments to advisers” sometimes encountered in retail investing, he said.

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