Does the New Fiduciary Rule Really ‘Level the Playing Field?

Does the New Fiduciary Rule Really ‘Level the Playing Field?

May 07, 2024

Please read my contribution to this article published in Fiduciary News...

Does the New Fiduciary Rule Really ‘Level the Playing Field?
by Christopher Carosa May 7, 2024

Veteran investment professionals have complained for decades about an uneven regulatory playing field. Regulators held Registered Investment Advisers to a much higher level of accountability than those regulating securities firms (including brokers and insurance providers). As the differing business models find themselves in increasing competition, this uneven regulation has been called nothing less than unfair.

Enter the Department of Labor to do something about it.

When the DOL released its 2024 Fiduciary Rule (see https://www.federalregister.gov/public-inspection/2024-08065/retirement-security-definition-of-an-investment-advice-fiduciary) it broadly proclaimed its intention to “level the playing field” between service providers. Indeed, the DOL uses the metaphor twice in its release. Indeed, we see the DOL bluntly stating:

“The Department expects the addition of ERISA remedies and the Department’s enforcement resources to enhance protection of retirement investors in Title I plans, and to better ensure that advice providers compete on a level playing field where recommendations are made pursuant to a common best interest standard.”

and,

“these changes reduce the gap in protections with respect to ERISA-covered investments and level the playing field for all investment advice fiduciaries.”

These are bold statements. Why exactly is the DOL targeting this goal right now?

“The DOL aims to expand the scope of fiduciary responsibility to more financial advisors by updating the definition of who is considered a fiduciary when providing investment advice,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “By redefining fiduciary duties and tightening exemptions, the DOL believes it can reduce the potential for conflicts of interest that could bias investment advice. The rule seeks to ensure that advisors prioritize their clients’ interests over their own financial gains, thereby protecting retirement investors from advice that an advisor’s financial interests could influence. Believing that the previous rule from 1975 is outdated, the DOL is modernizing the regulatory landscape to reflect current financial products and retirement planning needs. This includes acknowledging the broader range of investment options available today and the more complex decisions that retirement savers must make.”

The key, then, is to make it more difficult for service providers to bury fees and conflicts of interest.

“The primary focus of this new rule is to enhance the accountability and transparency of financial advisors and firms managing retirement plans and providing investment advice,” says Brandy Burch, CEO and founder of Benefitbay in Kansas City, Missouri. “Essentially, the DOL aims to address concerns around conflicts of interest that can negatively impact plan participants and beneficiaries. By redefining what constitutes an ‘investment advice fiduciary,’ the rule seeks to ensure that advisors act in the best interests of their clients, rather than being swayed by potential financial incentives that could conflict with those interests.”

What exactly has been the problem that the DOL is now addressing?

“The DOL aims to make sure financial representatives and investment advisors are doing the right thing when providing advice to retirement investors, as the savings within their plan often represent their most significant nest egg,” says Luan Dollens, chief compliance officer for Aldrich Wealth LP in Lake Oswego, Oregon. “Historically, rollover dollars have bolstered revenues through commissionable product sales or accumulation of assets under management for fees. Different standards have existed within the industry based on the type of financial professional you are – RIAs have the higher fiduciary standard, while broker/dealers and insurance representatives have the best interest standard. Unfortunately, previous rules left some financial professionals out of the standards requirements. With this newest fiduciary rule, everyone is subject to the same standards when dealing with retirement investors.”

This is potentially a big change in the way some companies do business. Who will this impact the most?

“Because some providers are able to exempt themselves from the ERISA rules, they are able to bypass some regulations and charge large commissions on annuities like IRA Rollovers,” says Derek Jacques, attorney & principal owner at The Mitten Law Firm in Southgate, Michigan. “This will now be regulated and commissions will be more reasonable.”

“It requires anyone who gives such advice to adhere to the standard,” says Jerry Schlichter, founding and managing partner of Schlichter Bogard in St. Louis, Missouri. “Formerly, insurance brokers, for example, contended that they were not governed by the fiduciary standard of ERISA (Employee Retirement Income Security Act) because they are governed by state laws.”

If all goes according to plan, failure to be faithful to the DOL will open fissures everyone can see.

“Conflicts of interest will become more visible,” says Ron Surz, president of Target Date Solutions in Sacramento, California. “For example, selecting target date funds. Also, newer approaches for QDIAs will gain acceptance because they better serve beneficiaries.”

Where are you going to find the mechanism that levels the playing fields?

“The new Rule creates a uniform set of rules that financial professionals will need to adhere to regardless of whether they are sitting in an advisory position or as a registered rep acting as a broker,” says Jason Grantz, managing director at Integrated Pension Services in Highland Park, New Jersey. “Either way, the advice must be in the best interest of the participants, the fees must be levelized, with adequate protections to ensure that the participants are not subjected to potential harm.”

Now that we know the who, what, where, and why, it’s time to take a look at the how.

“The new Fiduciary Rule is designed to ‘level the playing field’ among service providers by imposing stricter standards and clearer responsibilities for those who offer investment advice to retirement plan sponsors and their participants,” says Burch. “This ensures that all advisors, regardless of their company size or the types of services they offer, adhere to the same high standard of fiduciary duty. This means that financial advisors are required to prioritize their clients’ interests above their own financial gains, such as avoiding recommending investment products that offer the advisor higher commissions but might not be the best choice for the client.”

How will service providers see this manifest itself in everyday operations?

Michelle Capezza, of counsel at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. in New York City, says, “The new rule will subject more financial industry professionals and the provision of more types of retirement investment advice to ERISA fiduciary standards. Recommendations related to plan rollovers, annuity purchases, and other investments not subject to the SEC’s regulations are also subject to this higher prudence standard in the contexts as defined in the new rule. Therefore, investment professionals across the financial services industry that advise retirement investors as defined in the rule will be subject to the same fiduciary standards on a so-called level playing field, rather than being subject to varying suitability-type standards.”

Specifically, the DOL intends to raise the bar when it comes to utilizing certain prohibited transaction exemptions.

“One noteworthy example is rollover recommendations,” says Jeff Coons, chief risk officer at High Probability Advisors in Pittsford, New York. “Now that all types of ‘advisors’ will be held accountable for their rollover advice under PTE 2020-02, they will need to evaluate their product recommendations against the alternatives, including remaining in the plan. Investment advisors who have acknowledged their fiduciary responsibilities have been weighing those alternatives for years without hiding behind pages of fine print disclosures. Now, ‘advisors’ registered as brokers or insurance agents will be able to say the same.”

Finally, how will this leveling of the playing field be detected by potential clients?

“The rule emphasizes significant disclosure requirements,” says Bavetz. “Advisors must provide clear and comprehensive information about the fees, compensation, and potential conflicts of interest associated with their advice. This transparency allows clients to make better-informed decisions and ensures that advisors cannot gain an unfair advantage by concealing such information. Furthermore, the conditions under which advisors can qualify for Prohibited Transaction Exemptions (PTEs), rule aims to discourage practices that prioritize advisors’ financial interests over those of their clients. This includes stricter oversight on rollovers and other high-stakes financial decisions where conflicts of interest are particularly impactful. The rule is designed to ensure that all financial advisors can compete for clients’ business based on the quality of their advice and the trustworthiness of their services, rather than on less transparent competitive advantages such as hidden fees or misleading promises. This helps create a more equitable market where the best advisors, rather than those with the most aggressive sales tactics, are rewarded with client trust and business. The implementation of these measures, claims the DOL, will create a more equitable and trustworthy environment for retirement investors, where the focus is on the quality and reliability of financial advice, rather than on navigating a landscape of uneven standards and practices.”

For all the good intentions, however, what will happen when the rubber finally meets the road? Will the new DOL Fiduciary Rule really level the playing field?

“While the new rule aims to standardize requirements, the fact is not all advice is level or equal,” says Dollens. “Financial professionals with limited licensing and product offerings may struggle to provide truly impartial advice in line with the ERISA standards. In other words, if someone is licensed to sell only blue products, then of course they believe that blue products would be in your best interest. It may likely be that orange products are better suited for your needs and goals, but due to only offering blue products, the investor may never learn about the orange options.”

Ah, the old “color blind” test. It’s awfully difficult to pass this test when all you see are shades of gray.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA.