Proposal to apply fiduciary standards to retirement advice could have a far-reaching impact on financial services


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On April 20, 2015, the Department of Labor (“DOL”) proposed regulatory changes that could have a widespread impact on the financial services industry. The amended rules are designed to protect the public from questionable retirement investment advice by requiring retirement advisers to follow strict “fiduciary” standards – putting their clients’ best interests before their own. However, the potential ripple effect of the proposed changes extends far beyond the realm of retirement advice.

Existing rules in this area were defined by the Employee Retirement Income Security Act of 1974 (ERISA), which was established at a time when professionally managed pension funds were the retirement norm. Over the past 40 years, however, self-managed investments such as Individual Retirement Accounts (IRAs) have taken over as the primary way to save for retirement – increasing the risk and impact that ordinary, middle class investors will be harmed by bad advice from retirement advisers tempted by hidden fees, back-door payments, and other conflicts of interest.

The proposed ERISA amendments, which are currently in a 75-day public comment period, include:

  • A revised definition of “fiduciary” that broadens the scope of market participants who will be considered investment advice fiduciaries and therefore subject to ERISA’s strict fiduciary requirements.
  • New and amended prohibited class exemptions that could require substantial changes to operational and compensation models for many affected firms.
  • New and amended prohibited transaction class exemptions, including a “Best Interest Contract” exemption that would require widespread contracts between advisers, financial institutions, and each retirement investor.

The proposed rule changes could affect a wide range of financial institutions with direct or indirect involvement in retirement-related assets, including brokers, insurance companies, and banks – just to name a few. Although the specific impacts are unclear and will likely be different for every organization, here are some examples of potential impacts:

Potential front-office impacts

  • Reduced financial advisor access to products and services (e.g., establish “off the rack” offerings, limit product customization) due to increased risk and technology requirements
  • Re-balance financial advisor compensation to reflect the changing mix of responsibilities between the sales force and operations
  • Increased documentation to support a historical audit trail

Potential compliance and control impacts

  • Increased litigation/regulatory costs
  • Significant increase in disclosures and documentation collected, monitored, and stored by the back office (e.g., “Best Interest Contract” documentation)
  • Increased compliance/surveillance costs and data collection necessary to monitor client activity
  • Training for financial advisors, clients, and back office staff affected by the amendments
  • Increased scrutiny on affiliate products and services

Potential client impacts

  • Education and additional consent will be required for the new disclosures
  • Products and services may be limited or restricted based on client profile

Although the Securities and Exchange Commission (SEC) is also examining this issue and might offer different guidance, the DOL — spurred by the White House — has signaled an intent to move as quickly as possible. As such, firms should take action now to understand how the proposed changes are likely to affect their people, processes and systems – and to identify what will need to be done to achieve compliance. Firms can then help shape the final rule by communicating their issues, concerns and suggestions to the DOL, either directly or in concert with their industry associations before the 75-day public comment period comes to a close.

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