When the Department of Labor (DOL) recently announced proposed regulations updating the ERISA definition of a fiduciary, many industry heavyweights publicly proclaimed that this was going to hurt the small investors by causing brokers to exit that end of the market. Meanwhile, some advisors have used the news to call my clients, warning them how the recently “enacted” DOL regulations would affect them, unless, of course, they hire that advisor.
Since 1975, the DOL has used a “five-part test” to determine if an advisor was a fiduciary. They have been trying to replace that test with a new definition since 2010. To be clear, the regulations as proposed, may not see the light of day for a year or more, if ever. If and when it finally goes into effect, there is going to be virtually no impact on plan sponsors at all.
That’s because the main intent of the proposed regulation is to force commission-based brokers who advise plan sponsors on retirement plans to a higher fiduciary standard. Currently brokers only have to adhere to a loose standard that an investment is generally “suitable” for the client. This can result in brokers steering their clients into investments, even those more profitable to the broker, as long as they can demonstrate, upon request, that the investment was suitable.
The higher fiduciary standard requires advisors to act in the best interest of the plan participants and that they act as a prudent expert. Advisors who are fiduciaries share in the responsibility of running the plan and the consequences of any breaches.
I see nothing wrong with forcing all brokers and advisors who handle retirement plans to adhere to the same higher standard. This would be the best way to ensure that plans meet their primary objective, to benefit the participant.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services offered through Global Retirement Partners, LLC, a registered investment advisor. Global Retirement Partners, LLC, Frenkel Benefits, LLC, and LPL Financial are separate and non-affiliated companies.
Securities regulations prevent Gary from publicly responding to comments on this blog post. Third party posts found on this profile do not reflect the views of LPL Financial and have not been reviewed by LPL Financial as to accuracy or completeness.