Claims have been made, as a result of industry sponsored research, suggesting upwards to 7 million IRA holders will find themselves without an adviser should the DOL’s proposed new fiduciary rule be extended to cover IRAs. The Wall Street Journaleditorial even goes so far as to state “Brokers would have to weigh the cost of higher regulatory complianceagainst staying in the business.”Factually, this is an incorrect statement. The DOL has repeatedly saidbrokers can continue to provide brokerage services to IRA holders (and ERISA plans in general) without changing their existing business model even after the new fiduciary rule is adopted. What brokers can’t do, according to the DOL’s proposal, is offer investment advice under the current model. Presently, the SEC allows brokers to offer “incidental” investment advice without requiring them to register under the 1940 Investment Advisers Act (“40 Act”). The DOL cannot require brokers to register (that’s the SEC’s job), but it can enforce the fiduciary standard by defining broker adviser services under the same umbrella as it does RIA adviser services.
At the heart of this issue lies the “conflict-of-interest” dilemma. Under trust law, fiduciaries are prohibited from taking an economic interest in transactions executed on behalf of a beneficiary. This means, normally, an RIA would not be permitted to collect a commission (or 12b-1 fee) from a mutual fund company it invests a client’s money into. Oddly, while the 40 Act does indeed prohibit self-dealing transactions, the DOL has issued at least two opinions that exempt fiduciaries from this prohibition if the fiduciary discloses such a conflict-of-interest exists and the client signs off on it and the fiduciary uses those commissions (or 12b-1 fees) only to offset their normal fee. The DOL has not said anything to indicate this exemption would be removed under the proposed new definition of fiduciary. (This matter, by the way, has disturbed many fiduciary advocates.)
The question really becomes why is the financial services industry against the fiduciary standard for IRA owners? Shouldn’t the clients interest always comes first?
Please comment or call to discuss how this affects you.
- Department of labor fiduciary rule: Major unintended consequences (thehill.com)
- Phyllis Borzi Wants to Save Your IRA (money.usnews.com)
- Momentum Builds to Place IRAs Under Fiduciary Umbrella (401kplanadvisors.com)