The rule, often cited as the US equivalent of the UK’s retail distribution review (RDR), is intended to put an end to hidden fees and conflicts of interest in the investment market.
The guidelines, published last week by head of the DoL’s employee benefits unit Phyllis Borzi, include 34 frequently asked questions (FAQs) and answers on the best interest contract exemption (Bic), which allows brokers to sell some commission-based products after signing an agreement with the client.
The regulation will have the biggest impact on brokers, who currently must sell investment products that are suitable for their clients, a less-stringent standard than the fiduciary requirement whereas investment advisers already adhere to a best-interest standard.
Last week, US banking giant Morgan Stanley confirmed it will use the exemption clause to carry on offering commission-based retirement accounts after the fiduciary rule comes into effect.
In the 24-page document, the DoL clarifies that the Bic exemption is available for all types of products both for retail advice and for individual retirement account rollover recommendations – whereby clients can transfer their 401(K) accounts into a pension policy known as investment retirement accounts (IRAs).
However, the agency revealed that the exemption doesn’t apply to automated platforms where advice is provided only through an interactive website and involves computers only.
Fee-based model
Seven of the questions the DoL focuses on involve financial advisers and wealth managers that charge a fee instead of commission, often referred to in the US as “level-fee fiduciaries”.
Independent advisers in the US, around 52% of whom advise on retirement, work on a fee-based model, do not receive commission and will not be affected much by the proposed rule.
However, the department states fee-based investment advisers who recommend that clients roll out of a 401(k) plan into an IRA must “document the reasons why the advice was in the best interest of the retirement investor,” if the fee the adviser charges is higher than the 401(k) fee.
Meanwhile, commission-based advisers will still be able to receive payments from their 401(k) and IRA clients, but will be required to sign a Bic with their clients, agreeing to place their own financial interests behind those of customers.
The DoL has said it will release two more guidance documents before the end of the year.
