The Department of Labor (DOL) fiduciary rule has recently undergone a series of setbacks and delays—but that hasn’t changed the fact that it has triggered a fundamental shift in the way many advisors currently do business. 

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Evidence of this shift is perhaps most prominent among advisors who provide retirement-related advice for major financial firms. Several major firms have recently joined the bandwagon of firms that prohibit commission-based compensation for financial advisors who act in a fiduciary capacity in providing advice related to 401(k) accounts—reinforcing the idea that the level fee compensation trend is here to stay regardless of the fate of the fiduciary rule.

The DOL fiduciary rule generally discourages advisors from charging a commission-based fee because of the perception that doing so may lead the advisor to act primarily in order to increase his or her commissions, rather than in the best interest of clients (i.e., creating a conflict of interest).  Level fees, on the other hand, tend to promote the idea of transparency in the compensation context.

As the name suggests, level fee advisors receive a flat fee that is often expressed as a percentage of the client’s 401(k) assets that are managed by the advisor. In other cases, the fee may be an upfront payment resembling a “subscription” type arrangement.

The level fee must still be reasonable, based on market standards, although this is not a term that has been strictly defined by the DOL.

While the full applicability date of the DOL fiduciary rule has been delayed (until July 1, 2019 for many provisions), some of its provisions did go into effect on June 9, 2017.  Generally, as of June 9, advisors must satisfy certain impartial conduct standards, which means that they must (1) make no misleading statements to clients, (2) receive only reasonable compensation and (3) make investment recommendations that are in the client’s best interests.

Fiduciary Rule Appeal

Under the fiduciary rule, many advisors who provide advice with respect to 401(k) plans or rollovers are now treated as fiduciaries subject to the heightened standard of responsibility. Therefore, although the rule is only partially effective, major firms have begun requiring advisors who provide 401(k)-related advice to do so only as fiduciaries receiving a level fee.

This shift allows firms to reduce potential liability and compliance costs because level fee providers and “robo” advisors are generally considered to meet the best interest contract exemption standards so long as they satisfy the impartial conduct standards outlined above. This is the case even though they may not fully satisfy the rule’s disclosure obligations (meaning that they need not acknowledge their fiduciary status to clients) or documentation requirements.

However, while these standards apply to advisors who provide investment-related advice to 401(k) plan sponsors and participants, advisors who provide advice related to rollover transactions involving retirement plans must provide written disclosure of their fiduciary status in addition to satisfying the impartial conduct standards.

Advisors should also be aware that the DOL has indicated that it will not enforce even the applicable portions of the rule against advisors and firms that are making a good faith effort to comply with the rule’s terms during the transition period that is currently underway.

Conclusion

While the fate of the fiduciary rule is far from clear (it could even be repealed under newly introduced legislation), its impact on the market for financial advice is already being felt—meaning that advisors should stay tuned for new developments in this area.