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What Does The New Fiduciary Rule Mean For Retirement Investors? By Bruce Talen, J.D., CFA
April 6, 2016

The Department of Labor (DOL) announced today its long-awaited new "fiduciary rule." The rule provides a new interpretation of the term fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code, which state that a person is considered a fiduciary to a plan or Individual Retirement Account (IRA) if he or she offers "investment advice for a fee."

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Under the prior rule, a person was not considered as dispensing investment advice unless they provided the advice "on a regular basis." The DOL adopted the rule in the mid-1970s at the beginning of the IRA and 401(k) plan experiments; and the old rule gradually became outdated.

Further, in application it meant that many service providers who called themselves "advisors" were not providing "investment advice" within the meaning of the rule. These advisors faced a more lenient "suitability" standard.

Among other changes, the new rule eliminates the requirement that advice be provided "on a regular basis" for an advisor to be considered a fiduciary. Under the new guidelines a person gives fiduciary investment advice if he or she makes recommendations on buying, holding or selling securities, or makes recommendations as to the management of securities or other property in a retirement plan or IRA. A one-time sale of a commission-based product to a retirement plan or IRA now triggers fiduciary status.

Of course, even the new rule contains limitations and exceptions. The most well-known of these, called the Best Interest Contract Exemption, provides conditional relief for common compensation arrangements, such as commission and revenue sharing, subject to certain conditions, including disclosure of costs and conflicts of interests.

Many broker-dealers had previously avoided providing advice on a regular basis. So the new rule, and its intended and unintended consequences, may force major changes for those broker-dealers. For broker-dealers selling commission-based products, satisfying the terms of the Best Interest Contract Exemption will prove challenging. Even for registered investment advisors and banks, who have been accustomed to compliance with the more stringent fiduciary standard, the rule will present challenges, especially for the rollover advice they provide to Traditional and Roth IRA owners. On the other hand, for some providers the new rule will offer opportunities.

For more information on the change in definition of fiduciary, please visit the U.S. Department of Labor web site at http://www.dol.gov/ where more details on the rule will be posted Friday.

Takeaways:
  • For plan sponsors, particularly small plan sponsors, expect a change in the service and documentation from advisors who previously provided advice on a non-fiduciary basis.

  • For IRA owners, expect more protection and more disclosure.

  • For plan sponsors and IRA owners, ask more questions of your advisors.

Disclosures:

Past performance is no guarantee of future results, and the opinions and other information in the investment commentary are as of April 6, 2016. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust Company Investment Policy Committee.

This material is not a recommendation of any particular security, is not based on any particular financial situation or needs, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.

The information in this commentary should not be construed as an individualized recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.

Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situations.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. All expressions of opinion are subject to change without notice depending upon worldwide market, economic or political conditions.

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ABOUT THE AUTHOR

Bruce Talen
Bruce Talen, J.D., CFA® Senior Vice President, Director of Risk Management Commerce Trust Company
Bruce joined Commerce Trust Company in 2004 as director of risk management. He has more than 30 years of experience in the trust and investment management business in both legal and leadership roles. Bruce advises Commerce Trust on regulatory, trust administration, employee benefits and securities matters. He has oversight responsibility for the financial advisory services group, the Commerce Trust legal staff and the specialized services group. In addition, he is responsible for the risk management activities of the company and serves as the chief legal officer of Commerce Investment Advisors, a registered investment advisor. Bruce graduated from St. Olaf College in 1979 and received his juris doctorate from Washington University School of Law in St. Louis in 1983. In 2004, Bruce earned the right to use the Chartered Financial Analyst® designation. He is a member of the Missouri Bar, the Illinois Bar, the CFA Institute and the CFA Society of St. Louis.
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