The Department of Labor's final conflict-of-interest rules usher in a new era for retirement investors and the advisors who serve them. The financial services industry, including RIAs, will need to adapt.
RIAs, even those who do not manage employer-sponsored retirement plans, should understand they are subject to the new rules if they service IRAs or advise individual investors on the roll-over of retirement plan assets. So now that the final rule is out, RIAs have several issues to consider.
Customer-care standards have been raised
Fine print is no longer a cure for disclosing conflicts of interest, and that's a step in the right direction for investors saving for retirement. All retirement plan advisors, including RIAs, are now subject to ERISA's sole interest standard, which is considered stricter than the best interest standard established by the Investment Advisers Act of 1940.
Advisors managing assets within retirement plan vehicles, including IRAs, will need to take a hard look at their own pricing and practices, because simply disclosing conflicts of interest is no longer good enough under the new rule.
The final DoL rule expands the ERISA care standards beyond advisors serving retirement plan sponsors and plan participants and now also applies those standards to the far greater number of advisors serving investors with IRAs.
IRA roll-overs in a new spotlight
The DoL's new definition of advice subject to ERISA standards has been expanded to specifically include recommendations to investors to roll over retirement plan assets into an IRA. An RIA advising a plan participant to move plan assets into an IRA that their firm manages will need to consider and document why the recommendation is in the investor's best interest under ERISA standards.
That could be difficult if the recommendation might result in the RIA receiving a higher fee for managing the IRA than what the investor was paying as a plan participant. RIAs will likely need to consider reviewing their process for recommending IRA rollovers and how they document that the recommendation was in the client's best interest.
Fee and revenue considerations
Fee-only RIAs may have an easier time complying with the final DoL rule than those who receive compensation from other sources. The latter category includes dual registrants who, in addition to charging a fee, may receive revenue from trailing mutual fund fees or managing alternative investments such as annuities, non-traded REITs and derivatives.
Revenue-sharing or other arrangements with third parties also could fall into the conflict of interest category under the rule.
Next step for RIAs
Fee-only RIAs who already have a fiduciary mindset should be well-positioned to comply with the new DoL requirements. Moreover, the rule will be implemented in phases starting April 2017, and advisors have until January 2018 to become fully compliant. That said, advisors should not delay in taking action.
As a first step, RIAs should take time to educate themselves, and seek out ERISA and legal expertise, to better understand how the rule could potentially impact their firms and the way they serve retirement clients. RIAs need to know that any variable compensation with respect to retirement accounts will be subject to the new rule.
They should review their business practices, including fee structures and compensation, as well as their sales practices in regard to retirement plans and IRAs with a view to identifying any areas that may be impacted. Close attention should be paid to how they will serve retirement plans and IRAs in light of the new DoL requirements.
Skip Schweiss is president, TD Ameritrade Trust Company, and managing director, advisor advocacy and industry affairs, TD Ameritrade Institutional.
Register or login for access to this item and much more
All On Wall Street content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access