What SEC’s proposed best interest rule means for plan sponsors

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Anyone who hoped the Securities and Exchange Commission might do the right thing and issue a uniform fiduciary standard holding brokers, bankers, insurance company advisers and investment advisers working for Registered Investment Advisers (RIAs) to the same set of rules had to be disappointed. That didn’t happen.

Those who thought the SEC might share a set of rules that were straightforward and easy to understand and apply were also let down. The proposal spans hundreds of pages.

Individuals seeking investment advice who hoped they wouldn’t have to worry whether their broker, banker or insurance company advisor was sharing advice as a fiduciary were also disappointed. This didn’t turn out to be a fiduciary rule.

Under the proposed rule, brokers, bankers and insurance company advisors are still permitted to share investment advice without being fiduciaries. Here’s a breakdown of what the proposed ruling means.

What the proposal means for retirement plan sponsors

Nothing. Absolutely nothing.

Any plan sponsor receiving investment advice from a broker, banker or insurance company advisor will still be receiving advice from someone who is not required to be a fiduciary.

If you work as an investment advisor for a brokerage firm, bank or insurance company you are probably relieved. If you are a client of one of these firms, you should be concerned.

Why “best interest” isn’t good enough

The rule requires that advisors working for brokerage firms, banks, and insurance companies provide investment advice that is in the best interest of their clients, subject to disclosure of all conflicts of interest.

This is confusing to me because if an advisor discloses a conflict, that doesn’t mean that the investment advice is suddenly purified and becomes in the client's best interest. Rather, any conflict of interest would seem to indicate that the advice really isn't in the client’s best interest.

I have friends working in other industries who are often “conflicted” out of business deals because they have a conflict of interest. The investment advisory business is the only business that I am aware of where government regulators encourage sharing of conflicts of interest and then say it is still OK for an advisor to do business with clients by sharing conflicted advice.


My friends do not believe me when I tell them this. They think I am making it up.

Why it’s important that your investment adviser is a fiduciary

I believe that the fiduciary status of the advisor/adviser determines whether the advice a client receives is essentially good advice. Here’s an example that illustrates what I mean.

It is the difference between an adviser acting as a fiduciary who sits on the same side of the table with you, shoulder to shoulder, versus a non-fiduciary advisor who is seated across the table from you. The adviser on the same side of the table is your partner, while an advisor sitting on the other side of the table is just another provider.

Fiduciaries have legal liability for their recommendations. They get sued if you get sued if they give you bad advice. If you take investment advice from someone who is not a fiduciary, and there is litigation, you get sued but the non-fiduciary does not.

Full disclosure: I feel strongly about this subject because I am an adviser working for an RIA, so I’ve always been required to share advice as a fiduciary that is in my clients’ best interest. It’s hard for me to understand why anyone would take investment advice from someone who is not a fiduciary. And why would anyone take investment advice from someone who openly acknowledges a conflict of interest?

What plan sponsors should do

The only investment advisers who will continue to be required to act as fiduciaries for the investment advice they share are advisers who work for RIAs.

You should find out what type of advisor/adviser you work with, whether they are signed on to your plan as a fiduciary, and whether any fiduciary limitations exist. Require them to state in writing the extent of their fiduciary relationship with your plan.

What’s next

These rules are not final. Investor advocacy groups hope they will be improved. A 90-day comment period will follow their publication. Regardless, it appears that there will continue to be two ways clients can receive investment advice, from those advisers serving as fiduciaries and from advisors that don’t.

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC.

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