Investor impacts of the new ‘fiduciary’ rule

A new rule issued April 6 by the U.S. Department of Labor will require all advice and recommendations on investments in retirement accounts to be in the best interest of the investor.
If the revelation that the investment advice you’re getting in your retirement account may not be in your best interest is a surprise to you, you’re not alone. In a recent survey by Financial Engines, 46 percent of individual investors mistakenly believe that all financial advisers are required to put their clients’ interests first.
It appears the department thinks it’s time for perception to better align with reality. The impetus for this rule is that, rightly or wrongly—a debate too loaded to address here—most investment advice does not have to be in the individual investor’s best interest. The White House and Labor are concerned that the absence of a fiduciary obligation has allowed some advisers to, in the department’s words, “put their own profits ahead of their clients’ best interest” by recommending investments that also pay commissions to the advisors. Advice to use or recommend commission-paying investments is known as “conflicted advice.” A recent White House Council of Economic Advisors analysis found that individuals lose up to $17 billion each year to costs from conflicted advice in retirement accounts.
Hence the “fiduciary rule,” introduced to reduce conflicted advice in retirement accounts. When it takes full effect on Jan. 1, 2018, some changes investors may notice are:
■ Advisers who recommend investments in a retirement account must acknowledge in writing that they will act as a fiduciary.
■   Advisers must adhere to certain standards, called Impartial Conduct Standards, that will, among other things, require advisers to give advice that is in the investor’s best interest, charge no more than reasonable compensation, and make no misleading statements about investment transactions, compensation, and conflicts of interest.
■   Advisers’ firms cannot give or use incentives that act contrary to a client’s best interest.
■   Advisers must fairly disclose all fees, compensation, and material conflicts of interest associated with their recommendations.
■   Individual investors can maintain their legal rights to pursue a class action against a firm that does not honor its fiduciary obligations.
Commission-paying investments are prohibited by the rule but can still be recommended if, among other things, the adviser adheres to the above changes and the investments are in the client’s best interest and approved in writing by the client. This written exception to the rule is the best-interest contract exemption. The Labor Department apparently hopes the heightened legal obligations from those conditions will slow or stop the sale of high-commission investments in retirement accounts.
The glaring drawback to the new fiduciary rule is that it only applies to retirement accounts, like IRAs, 401(k), and 403(b) accounts. It does not apply to after-tax accounts, like individual, joint, or trust accounts. That doesn’t mean that the new rule won’t indirectly affect non-retirement accounts. After 2018, there will be a seemingly untenable conflict of interest where retirement accounts are subject to a higher standard of care and a greater level of scrutiny than non-retirement accounts. As a result, advisers who use less-costly investments in a client’s retirement account, but not in the client’s non-retirement account, will have some uncomfortable explaining to do.
Another drawback to the new rule is the long delay before it becomes fully effective. The industry (and, at its behest, the government) is already pushing back en masse. Already, a number of lawsuits have been filed by national and state industry groups seeking to block the rule, and both the House of Representatives and Senate have passed resolutions to block it.  
Ultimately, whether the rule takes effect, what form it takes if it does, and how it will be interpreted—it’s 1,023 pages long—will likely continue for months. Even if it takes effect, it will potentially be years before the full impact of the new rule is known.
In the meantime, there is already a group of investment advisers who are, and for decades have been, legally obligated to put their clients’ best interest first at all times (in retirement and nonretirement accounts). They are fee-only registered investment advisers.