What to expect if your retirement plan adviser is not a fiduciary

On Wednesday, April 6, 2016 the Department of Labor issued its final fiduciary compliance rules for investment advisers working with retirement accounts. The rules were aimed specifically at brokers who provide investment advice to clients under the “suitability” requirement (which exempted brokers from being fiduciaries). The issuance of these final regulations ends a long war that the brokerage industry waged against regulators, employing all manner of threats to avoid fiduciary responsibility (e.g., small clients will not be able to receive investment advice – absolutely ridiculous) and spending millions on intense political lobbying. Who won? Remarkably, plan sponsors!

A fiduciary’s responsibilities are both ethical and legal. They are required to provide advice that is in the best interests of their clients rather than themselves and cannot benefit personally from advice shared. Fiduciaries must adhere to the prudent person rule, which states that advisers should act with skill, care, diligence and use good professional judgment. Additionally, fiduciaries should never mislead clients, always provide full and fair disclosure of all important facts and avoid conflicts of interest. That seems reasonable, doesn’t it?

Investment advisers working for registered investment advisory (RIA) firms are required to be fiduciaries, providing investment advice that keeps their client’s best interests first and foremost. (Full disclosure here, my firm is a RIA and I believe in being a fiduciary to my clients.)

Advisers who work for brokerage firms were allowed to exercise a lower standard of care to avoid fiduciary responsibility, called suitability, when providing investment advice to their clients. Suitability can best be defined as recommending investment options or products that are appropriate for the investor. There was no requirement that a broker put a client’s best interest before his/hers or the brokerage firms. This sometimes led brokers to recommend investment products that were best for the broker and his/her employer while only suitable for the client. The new rules require that all advisers providing investment advice to retirement accounts be fiduciaries.

The impact on plan sponsors

Nearly all positive. Most retirement plan sponsors have a hazy understanding about what a fiduciary is and if their adviser is acting as one. Plan sponsors working with advisers who haven’t been acting as fiduciaries will be approached by these advisers as they begin to define a new working relationship. They are likely to outline relationships that feature higher costs. There will also be additional paperwork to sign, which describes their fiduciary limitations.

If what you are hearing troubles you, keep in mind that there are plenty of RIAs out there who are eager to work with you in a cost-effective way. Brokers were dragged kicking and screaming into a new fiduciary world. Don't feel that you have to work with a broker who views his/her new responsibilities as a burden. These regulations benefit you, the plan sponsor. Any adviser who whines and complains about taking your best interests into account when providing investment advice is not worth working with.

Those brokers and advisers who weren't acting responsibly as fiduciaries will be re-evaluating their business models. Many will find it difficult or impossible to adhere to their new fiduciary duties. Some may exit the business. All advisers will have until Jan. 1, 2018 to comply with the new regulations. Now may be a good time to re-evaluate the relationship you have with your adviser, at the very least to gain clarity on his/her fiduciary relationship with your 401(k) plan.