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5 Takeaways From the Fiduciary Rule Delay

The Department of Labor's new rules will go into effect later than planned, but the momentum toward offering holistic advice is inescapable, writes Morningstar's Aron Szapiro.

The Department of Labor is delaying the applicability of its fiduciary rule from April 10 to June 9. In a change from the original proposed delay, the department also will push back additional requirements until Jan. 1, 2018. Here are five key takeaways as the department prepares to publish the final rule on April 7.

  1. The new definitions of a fiduciary will go into effect along with the impartial conduct standards on June 9--60 days later than originally planned. This means that on June 9, IRA advisors and others will be expected to provide advice in retirement investors' best interests, charge no more than reasonable compensation, and avoid misleading statements.

  2. It is important to remember that there was always supposed to be a transition period for firms to be fully compliant with the best-interest contract exemption. That transition, which was from April 10 to Jan. 1, 2018, will now be easier. Originally, firms had a number of disclosure, monitoring, and record-keeping requirements during this transition, but these requirements have been delayed. (Firms may wish to voluntarily set up monitoring and record-keeping functions.)

  3. We believe this delay may prove helpful, particularly when it comes to implications to how advisors get paid, like T shares, which were introduced this year and would provide commission-based financial advisors with a way to comply. Without the delay, mutual fund companies would have needed to file their T shares by February so advisors could show extended performance ratings and then sell them to clients in April.

  4. The department also has requested comments from the public as it complies with President Donald Trump's memorandum requesting an examination of rule. Those comments are due April 17 and will be publicly available. Despite this review, we continue to believe that fully undoing the rule is unlikely, and the broad principles will likely survive. We think the most likely area for adjustment is around the introduction of class action lawsuits as an enforcement mechanism. The DOL may introduce ways for firms to comply and lower their risk of getting sued.

  5. The momentum toward offering holistic advice is inescapable. Regardless of what happens with the DOL's fiduciary rule, the reality is that firms are moving toward a client-centric business model and delivering financial services that put investors' interests first.

Learn more about how Morningstar can help advisors deliver best-interest advice to investors.