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5 Legal Musings on the Final DOL Fiduciary Rule

  • By  Scott D. Calhoun
  • |
  • June 21, 2016

Now that the Department of Labor (DOL) has published its final rules on investment advice standards for retirement accounts, the business and legal blogs and newsletters covering the financial and investment world are flooding the marketplace with analysis, planning tips, doomsday warnings, and general commentary.

Here’s one more.

Rather than trying to provide in-depth analysis or commentary (there will be plenty of that from compliance departments and broker-dealer legal counsel), I thought I would provide my thoughts on 5 aspects of the new rule and its impact.

1. Fiduciary standard vs. suitability standard.

The rule is basically imposing a fiduciary standard on providing investment advice in the retirement setting. This replaces the long-standing suitability standard. Advisors now have to act in the best interest of their clients rather than providing investments that are suitable. The rule relates only to retirement related investment advice, but of course that can be a significant portion of the business.

2. Conflicts of interest.

The primary emphasis is on avoiding or providing complete disclosure concerning conflicts of interest. For example, recommending products which earn you or the firm additional commissions. The Rule establishes a new regiment for disclosure and provides for a “Best Interest Contract Exemption.” The detailed compliance requirements may favor the large firms because of the resources required to implement website and data comparisons.

3. One potential consequence: growth of fee-only advisement on retirement accounts.

If the compensation received is fee-only, then there is no conflict of interest. Smaller and mid-size firms may not be able to efficiently implement all the compliance layers required by the DOL rule. The entire retirement investment landscape could be impacted significantly.

4. Effective date of the Rule: April 2017.

Seems like a long time in the future, but with the detailed compliance issues that will have to be addressed, time is of the essence.

5. Any relief coming?

Congress has passed resolutions nullifying the rule, but the resolutions will be vetoed and the votes to override do not exist. The U.S. Chamber of Commerce and others have filed a lawsuit asking a federal court to decide that the Rule is outside of DOL’s authority. Whether that lawsuit will have any effect is unknown, but a quick decision from the court is not likely. So, the better approach is to plan on the Rule being effective in April 2017.

A Final Thought

If the Fiduciary Rule goes into effect with no further changes, the retirement investment advisory business will continue. It may change, but it will not go away. As with other market changes, those advisors who embrace the change will be more successful than those who ignore it.

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Author Bio

Scott serves as Ironstone’s legal counsel and has more than 25 years’ experience in corporate law. He has a broad base of experience in the formation and structuring of all types of business entities and non-profit organizations as well as in mergers and acquisitions. Scott advises clients on a full range of business matters, including business entity formation, securities offerings, trademark registration and related agreements, lease negotiations, stock or asset acquisitions, employment agreements, partnership agreements, franchise agreements and related issues, secured lending or other financial transactions, shareholder agreements, and LLC operating agreements. Mr. Calhoun also has significant experience with estate planning, wills and trust drafting, and estate administration. Mr. Calhoun has served as general corporate counsel for a large number of small and medium size businesses. As corporate counsel, he advises clients on the full range of business legal matters described above, and he also consults on general business issues faced by those clients. His counsel also includes planning and implementation advice concerning asset protection and business succession issues, which often entails proper use of trusts and other planning vehicles. In the broader area of estate planning, Scott has significant experience with estate tax matters, drafting of wills, life insurance trusts, and other estate planning documents, and estate administration.