The long-awaited DOL Rule: What does it mean for you?

5 years ago

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The Rule:

You’ve heard it on TV, you’ve read it in the news, your friends and colleagues are talking about it, now we’d like to you understand it. On June 9, 2017 – just over two weeks ago – the long-awaited DOL Rule was put into effect, with a grace period for compliance by investment and insurance professionals through the end of 2017. This has been a fiercely-debated (and litigated) topic for several years in the investment management world. So, what does it mean for regular people out there trying to save and invest for their own retirement and their kids’future? Simply put, the rule provides that investment advisors, stock brokers and insurance producers can no longer put their own monetary gain ahead of their clients’ “best interests”.

In the past, these professionals could sell products to clients resulting in large commissions, so long as the product was “suitable”. It did not matter if there was a product that better met the objectives of the client or even if the client needed the product in the first place. As long as the ultimate product was deemed suitable, the agent or broker was free to sell products generating the highest commission for his/her firm, without disclosing such facts to the unsuspecting customer. The DOL Rule just put into place applies only to qualified retirement accounts such as IRAs and 401ks and is enforced by the U.S. Department of Labor. The DOL rule doesn’t ban commissions or revenue sharing, but it requires advisers who accept them to have clients sign a best interest contract exemption, or BICE. It pledges the adviser will act in the client’s best interests and only earn “reasonable” compensation. The exemption also must disclose information to clients about fees and conflicts of interest.

The critical distinction concerns what is in the best interest of the client versus what is simply suitable for the client. The requirement to serve in the best interest of the client results in the professional being held to a much higher “fiduciary” standard. In everyday terminology, this means that the client’s interests must be put ahead of the professional’s interests. As an attorney, it’s is hard for me to imagine how it could ever be any other way. Sadly, in my opinion, the financial services industry has relied on transaction based compensation to push its products for decades. To get products sold they needed to pay salesmen (investment advisors, stock brokers and insurance producers) commissions. As more and more products began competing for the same market space, those products that paid the highest commissions were the ones that were sold. It didn’t matter what the product was, just that it passed the suitability test.

The Debate:

The debate currently centers around the effect this rule will have on downstream customers’ access to products. The insurance industry has argued that the rule will not only put certain insurance and brokerage professionals out of business because they do not have a license that allows them to act as a fiduciary, but also that many good products will be removed from the marketplace over fears of litigation. Companies are concerned that they will be sued for distributing products that do not meet the new requirements. That threat of increased liability will push some advisers away from a long tradition of charging clients based on transactions, to a compensation method that carries lower liability risks, that of billing clients a set fee.

What Now?:

I believe that the new rule is a much-needed improvement and will ultimately lead to a better, more transparent and qualified financial services industry. The short-term pain in adjusting to a new way of doing business is far outweighed by the greater long-term good.

This short blog is by no means a comprehensive review of the new law or its exceptions, but seeks to provide a simple overview. If I could advise a client to ask one question of their investment or insurance professional it would be “How do you get paid?” The answer to that question is very important. Make sure you understand the difference between fee based or hourly compensation and commission based compensation.

You’re not going to stop hearing about these changes any time soon. Please reach out to our office if you have any questions or concerns. We’d be happy to meet with you and discuss further.

-G. Chadd Mason


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June 22, 2022

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