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Polsinelli Commercial Litigation


April 2016


Much-Anticipated Fiduciary Rule Presents New Challenges to Financial Services Industry







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Paul R. Wood



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Thomas H. Wagner



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The U.S. Department of Labor released its long anticipated "fiduciary rule" on April 6, 2016. The rule requires brokers and financial advisers to put their clients' interests ahead of their own when recommending retirement investments, a higher standard than the prior requirement that brokers promote investments that are "suitable" for the client even if other, lower-cost alternatives exist.

The new rule may cause advisory firms to attempt to move investors from commission-based accounts to fee-based accounts where fees are structured as a percentage of assets invested and based on the type of investment product sold. (Fee-based accounts are already subject to fiduciary standards.)

The new rule also may lead investors to use discount brokerages or so-called "robo-advisors," which are online investment accounts that use algorithms to help people create portfolios on the belief that these alternatives will be more affordable than working with a financial adviser.

The purpose of the rule is to protect investors with retirement accounts from poor or conflicted investment advice, such as when an adviser is paid by a mutual fund company or another third party for recommending a particular investment. Brokers can continue to earn commissions and engage in revenue-sharing arrangements related to sales of investment products, but they must enter into a contract with customers in which they pledge to act in their customers' best interest and disclose any relevant conflicts of interest. Brokers also will have to explain why they are recommending a particular product when a less expensive option is available, and may face increased scrutiny if they recommend complicated products.

The fiduciary rule released by the DOL was modified in response to more than 3,000 comment letters received on the rule as originally proposed. Most notably, the rule expanded the so-called "best interest contract exemption," which allows advisers to collect commissions from sales to cover any type of financial product an adviser might recommend (such as real estate investment trusts and listed options) rather than a specified list, as originally proposed. The new rule also exempts a broader class of plan sponsors.

Under the proposed rule, investment recommendations to plan sponsors that manage more than $100 million in assets would not be considered advice subject to the fiduciary rule provided certain conditions are met. Under the final rule, that threshold was lowered to $50 million in assets. Educational information offered to retirement savers about types of investments will still be allowed under the new rule.

Finally, the DOL is giving the industry more time to implement the final rule. The new rule will begin taking effect in part on April 2017, with full implementation in January 2018 versus the eight month implementation period in the proposed rule; however, investment firms advising clients on whether to keep their money in a 401(k) or roll their money over into an IRA will be required to meet the new standard on any advice they offer.

For More Information

The new fiduciary rule offers new challenges to the financial services industry, but Polsinelli is poised to help your business overcome those challenges. Contact the professionals at Polsinelli for help navigating the new rule.












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