New Federal Regulations for All Retirement Accounts (Including IRAs)

By Richard Del Monte

The Department of Labor (DOL) has issued sweeping changes to how advisors can interact with owners of retirement accounts in the U.S.A.

The regulations, which take effect on April 10, 2017, provide new protections for consumers against advisors who receive transaction-based commissions and have conflicts of interest that they have previously not been required to disclose to their customers.

The regulations require every advisor to a retirement account, including 401(k)s, 403(b)s, IRAs, SEPs, and even Health Savings Accounts, to:

  1. Acknowledge their fiduciary status with respect to investment advice to the Retirement Investor,
  2. Adhere to “Impartial Conduct Standards” which requires the fiduciary advisor to:
    • Give advice that is in the Retirement Investor’s Best Interest;
    • Charge no more than “reasonable compensation”; and
    • Make no misleading statements about investment transactions, compensation, and conflicts of interest
  3. Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards

Getting these regulations put into place has caused a battle royale between government and their allies (including the Registered Investment Advisory community which our firm is a member of) and the brokerage and commission-sales community. The commission folks have not wanted to be held to this higher legal standard of fiduciary care, because they would no longer be able to justify selling investments to retirement plan clients, including variable annuities, equity index annuities, illiquid real estate investments, or high commission-paying mutual funds.

What is really brilliant about this new rule is that the government doesn’t actually specify what can or cannot be sold or recommended to retirement clients. Instead, it just has to be able to survive a legal challenge in court by any client or class of clients. This gets the DOL and the IRS out of the nit-picking rule making business and just says to financial services companies, “If you want to sell it, you had better be able to justify it in court.” The penalties for not passing muster in court are that the entire firm risks being put out of business if they lose a suit and the judgements are too high.

Why should you care?  This is probably going to be the proverbial canary in the mineshaft for the entire financial advice industry in this country.  Can you imagine in a few years people putting up with their retirement accounts having to be managed and advised with one very high standard of care, while at the same time unscrupulous advisors are still able to peddle their garbage investment products to clients in their taxable, non-retirement accounts?  We are hoping that within five years, the entire industry switches to the new “client’s best interests” level of care.

For Del Monte Group, since we already operate at or above this new high fiduciary standard of care, the changes that will be imposed on us, and by extension, you as our client, appear to be very minimal. We will be including some additional new language in our advisory contracts and there will probably be an additional form or two for new clients to sign.  These new DOL rules are meant to move advisors to where we have already been for many years now, and this is why the regs don’t appear to have much impact on our business. You have chosen your advisor wisely!

Please let us know if you have any questions about these new regulations.


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