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Fiduciary Duties

The New DOL Fiduciary Rule

What This Means for Advisors and Broker-Dealers

Brian Mathews Feb 21, 2017



This article will discuss the likely changes that both advisors and broker-dealers will need to make before the deadline and how those changes might impact target investors.


Financial Advisors Need to Provide a Fair Playground for Clients


The first step that financial advisors (FAs) are taking is converting all qualified commission-basis accounts to an advisory basis. The DOL believes that much of the conflict of interest that FAs face is the different level of commissions on investments. A-Share mutual funds, for example, have a high upfront sales charge along with an internal expense ratio. When compared to an exchange-traded fund (ETF), there is no sales charge outside of a commission and a much lower expense ratio. The DOL wants FAs to select only the most appropriate investment for their clients, regardless of what they get paid as a fee. If both these options were available to an advisory account, the only comparisons should be the expense ratios and the investment returns. Check out the cost considerations of mutual funds when compared to ETFs.

If the rule is implemented, clients that want to remain in a commission-based account will be required to sign a Best Interest Contract Exemption (BICE) form. However, this contract does not necessarily mean that any investment can be bought or sold in the account without justification and FAs will need to heavily document client conversations.


Impact on Traditional Commission-Based Strategy


The first step in this process is to ensure that each client’s financial objectives, goals and risk tolerance are aligned with their current investments. If a client has “conservative income” as their investment objective, his or her account should only have cash and fixed-income investments. Heavy exposure to stock or other investments would not align with the investment objective and leave both the FA and BD possibly liable for not acting in their fiduciary capacity.

To help mitigate these risks, BDs need to ensure that a client’s goals are better aligned to the investment strategy. BDs have begun to help their financial advisors develop a systematic approach of aligning their client’s financial goals with their investment advice before the April deadline. Advisors are required to meet and review all of their client’s investment accounts in an effort to ensure the accuracy of the firm’s financial information.


Transition of Advisory Role to a Financial Planning Role


FAs who obtained the Certified Financial Planner (CFP) designation are already accustomed to the fiduciary rule, as it is required to act in the best interest of the client if you hold the CFP designation. The DOL is looking for FAs to provide more comprehensive financial planning advice to their clients in exchange for higher fees. Otherwise, the DOL does not see value in an advisor who merely charges for transactions.


Impact on Mutual Fund Issuers


On the other hand, ETFs that have much lower expenses (consider VOO) are gaining more and more popularity. Many fund companies will be forced to either close non-performing funds or drastically reduce their expense ratios just to stay relevant in an ever more fee-conscious environment. You can read the reasons why FAs might choose mutual funds.


The Bottom Line


Consider this: acting as fiduciaries, FAs will give completely objective advice free of any conflicts of interest. Clients will get an investment choice that based on their specific needs, and not on an advisor attempting to generate a higher commission.

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