Last week’s long-awaited final ruling by the Department of Labor regarding conflict of interest and fiduciary standard is not as restrictive as the industry originally feared. In short: Financial professionals providing investment advice to retirement plans and IRAs must abide by a fiduciary standard and put their client’s best interests above their own.

Deeper transparency and a closer alignment of interests between client and adviser is not a bad thing. In theory, these changes should be a net positive for our industry and retirement savers across the nation. In practice, I’m not so convinced. I believe that this ruling may hurt the very investors it is aimed at protecting: the small individual investor.

The key issue concerns the Best Interest Contract, which is intended to disclose conflicts of interest, and increase transparency. Under the BIC, advisers can recommend a commissionable product—which they have a monetary incentive to recommend—but must disclose their conflict of interest and document the rationale for the advice that fulfills the “best interest” mandate of being a fiduciary.

Defining ‘best interest’

The trouble is “best interest” here seems pretty gray. I can make a case for a decision to be in a client’s best interest, but who’s to say that the adviser down the street can’t argue the opposite? What constitutes “best interest” legally when using a commissionable vehicle? There is no one size fits all answer and, in fact, it takes years to get a true picture of a client’s risk tolerances and objectives as they change over time. Best interest is a moving target, and this opens the door to potential litigation.

So why not move clients to fee-based accounts, sit on the same side of the table and remove the conflict? For advisers, eliminating commissions could lessen some of the litigation risk. But this could also increase the overall fees paid by the client over time, and that may not be in the client’s best interest—especially with regard to smaller investors.

"Aligning investor and adviser interests while increasing transparency is only going to better the retirement advice industry."

Starting to sound a little like Catch-22?

Aligning investor and adviser interests while increasing transparency is only going to better the retirement advice industry. The tradeoff is heightened liability, time and documentation costs, which may make working with smaller investors prohibitive, as fees will potentially need to increase commensurately with the new risks and costs. And, yes, this could price smaller investors out of the market. Was that the outcome that the DOL envisioned?

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The potential outcomes set forth may not develop as predicted. Securities and Advisory services offered through LPL Financial, a Registered Investment Adviser. Member FINRA/SIPC.

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