This article introduces the key tenets of the new ruling and the important factors that investors, especially those who are looking at retirement accounts, should be aware of.

The rule requires all fiduciaries to disclose all forms of investment fees. Under the new ruling, the DOL stipulates that a client needs to be presented with the lowest cost options available. So, for example, if three index funds were presented with very similar returns, the best option would be the fund with the lowest expense ratio. Make sure to verify if a fund’s fees are reasonable by reading our article on the topic.

The DOL also encourages that retirement accounts outside of 401(k) plans be advisory fee based. Therefore, commission structures are eliminated and the financial professionals truly work in the best interest of the client because their fee is determined by the account’s value. If the account grows in size, so does the fee. This also prevents professionals from using higher commission-paying products over lower paying ones.

Annuities, for example, often pay high upfront sales charges to the professional and would be much more profitable than buying a bond. If both were bought in an advisory account, the benefits of the annuity would be the only reason to purchase it for the client and the high commission payout would not be a deciding factor. This is why the DOL favors advisory accounts over commision-based accounts because the investment selection process is completely objective. You can also check various popular mutual fund themes to learn about options other than retirement-specific plans.

IRA rollovers are a large part of the DOL’s ruling and will undergo scrutiny going forward. Typically when a client leaves a job or retires, they have money invested in the company’s 401(k). They have the option to leave it in the 401(k) or roll it over to an IRA in a tax-free exchange. This is how financial professionals generate a whole set of new assets.

The DOL examined the value between leaving it in the old 401(k) and rolling it into an IRA. The 401(k) had very low internal fees and a exposure to the stock market and other asset classes. Rolling it over to an IRA would allow the client more investment options, as well as advice from a financial professional.

However, many clients in the past have been moved from a low cost 401(k) to a rollover IRA and put in a one-time, high-upfront-commission product. This would not necessarily be in the best interest of the client. As a result of the new ruling, clients can look forward to seeking the most cost-effective, post-retirement investment option over the long term.

Broker-dealers, financial professionals and investment advisors who work with qualified accounts will be impacted by the new ruling. Insurance agents who work with qualified accounts will also be impacted. For example, MetLife Inc. recently sold its brokerage business to MassMutual to avoid dealing with the new changes from the Fiduciary rule.

Anyone that works with or deals with qualified accounts will be required to act as a fiduciary for clients or be subject to the consequences of the DOL.

All retirement accounts need to make considerable changes, especially if they are commission based. Clients who want to hold on to their commission-based accounts need to sign the Best Interest Contract Exemption (BICE) form.

For investors, this means that the account can remain commission based but all fees, hidden or not, must be disclosed. Providers can avoid this route if the account becomes advisory based, but internal fees and expense ratios still need to be disclosed.

Some firms, like Merrill Lynch, are moving away from allowing commission-based IRA accounts and are requiring all accounts to become advisory fee based. This can be bad for clients who are not comfortable paying a fee, especially if they do not intend to trade frequently or want to remain invested for a longer timeframe.

Retirement accounts are now also undergoing new changes to ensure that they meet the fiduciary standards set forth by the DOL. Clients must be contacted and complete a financial review at least once a year. Risk tolerance, investment goals and accurate financial information about the client must be properly monitored and match the client’s current investments.

For example, a client with a conservative risk tolerance should not be investing solely in stocks. Therefore, the financial advisor needs to re-evaluate the client’s tolerance and investments to ensure they are aligned.

With the brokerage firms requiring more compliance for their retirement accounts, many have decided to limit the number of accounts they are willing to retain. This leaves accounts of lower value to move to a call center advisory option or find advice elsewhere.

For example, an advisor may decide that all IRA accounts below $100,000 are not worth the risk of going through the fiduciary rule standards, if he can shift those accounts to the firm’s brokerage call center. This area works as a lower-cost alternative for accounts where one advisor services thousands of accounts.

Although this may be a way to save costs for the client, the quality of advice and customer service will be considerably lower than having an independent financial advisor.

In the end, the DOL fiduciary rule is causing major changes to the financial industry, especially those dealing with retirement accounts. The rule is expected to have a positive impact on clients as they will now be more informed on the different decisions available and the costs associated with each investment option. However, the ruling also has negative connotations as several investors may now find that they do not have the assets to qualify for a financial advisor and may be stuck handling their own investment decisions.

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