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Stock Strategist Industry Reports

Fiduciary Rule Puts Greater Focus on Holistic Advice

For now, the rule is likely to be an underappreciated consumer protection.

You've probably already seen a lot of articles on the U.S. Department of Labor's new conflict of interest rule, but what does the new rule really mean to investors, the industry, and advisors?

When it comes to investment advice, advisors are separated into two categories: registered investment advisors and brokers (anyone who is not an RIA). RIAs are required to act in a fiduciary capacity, meaning that all recommendations must be in the best interest of the investor, while brokers have been held to a suitability standard. This means as long as the recommendation is suitable, it doesn't have to be what the broker believes is best for the investor. Translation: Brokers can recommend investments that pay themselves commissions.

Clearly, from a consumer standpoint, requiring fiduciary standards for all advisors would be great. However, this new rule is not coming from the U.S. Securities and Exchange Commission; it is coming from the Department of Labor. Thus, nothing is changing for regular investment accounts--only retirement accounts.

So, what exactly does the new rule say? Essentially, anyone providing investment advice to IRAs and retirement plans, such as 401(k)s and profit-sharing plans, must put the interests of the investor first and must clearly disclose any conflicts of interest that might prevent the advisor from acting in the investor's best interest. Although current rules impose fiduciary requirements on retirement investment advice, the new rule broadens the definition to include any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner.

As with most laws, there are exceptions that are not subject to fiduciary requirements.


  • Retirement education: general education on retirement savings and asset allocation
  • Order-taking: if a customer instructs a broker to buy a specific investment
  • Sales to plan fiduciaries: sales to large employer-based plans, with plan fiduciaries looking after the participants' best interests


What does this mean to investors? Many investors won't know the difference. Consumers are largely unfamiliar with the difference between an RIA and a broker (or insurance agent or other salesperson). They are all viewed as investment advisors in the public eye. The publicity around this new rule might bring about some awareness, but, for now, the rule is likely to be an underappreciated consumer protection. As the fiduciary standards are implemented, individual investors will no longer be persuaded to buy expensive investment vehicles such as high-commission mutual funds, variable annuities, and private offerings. This should result in higher retirement accumulation values in the long run.

As a result of this rule, the industry will shift. Although high-cost investments may still be sold to investors with nonretirement accounts, the shutdown of the retirement market will mean a greatly decreased market for these investments. There will probably be an increased market for no-load funds, index funds, and exchange-traded funds. We will see more brokers adopting a fee-based or fee-only compensation model.

RIAs will have less of an edge without the ability to claim exclusivity on the fiduciary label. What this means to advisors is that they will need to promote more firm-specific differentiators. Citing a fiduciary standard on all investments is good, but it won't mean a lot to uninformed consumers. Rather, claiming and following through on holistic advice, including financial planning and tax management, will become more important over time.

Implementation of the new fiduciary requirements should add no significant new costs to the government, while saving investors from hidden costs and fees in their retirement accounts. According to the White House's Council of Economic Advisers, the impact of higher costs and lower returns from conflicts of interests in retirement investing result in annual losses of about 1 percentage point for affected investors--or about $17 billion per year in total.

This new rule has been a long time coming. Let's hope that over time, investors will come to realize the importance of a fiduciary relationship with their investment advisors.