Managing assets

DOL rule set for April has firms evaluating how they provide services

Posted on Jan 2, 2017 :: Wealth Management
Posted by , Insight on Business Staff Writer

new Department of Labor rule designed to better protect investors’ retirement funds is set to become law in April, and wealth management firms are on alert.

The new rule, years in the making, mainly impacts broker-dealers, requiring them to be held to a fiduciary standard when making recommendations about a 401(k) or IRA. Essentially, it means they must always act in the best interest of the client rather than provide advice that could increase commission.

The DOL’s hope is that this will save middle-class families billions of dollars annually in fees, says Joshua Smith, senior vice president of private client services at Associated Bank of Neenah.

“That’s at the heart of this DOL rule — to make sure that retirees with their retirement savings aren’t being advised to move a balance into products that would double or triple the fees they were paying when they were in a 401(k) plan,” Smith says.

Two main types of firms generally provide investment advice: broker-dealers, who primarily deal with transactions directed by clients, and registered investment advisers (RIAs), who are geared more toward managing high-net-worth investors, Smith says.

Historically, broker-dealers have been held to a “suitability” standard, meaning they merely need to recommend a suitable product, which is different from having a legal and moral obligation to do what’s in the best interest of the client, Smith says.

“I think from the investor standpoint, the thought is, ‘They’re working in my best interest, that’s the requirement,’” says Benjamin Hayes, principal/senior financial advisor for Wipfli-Hewins Investment Advisors of Green Bay. “By and large, for many years, that hasn’t been the case for most investment relationships. … Once that gets unraveled and investors start to realize that, it’s a little surprising.”

The DOL aims to bridge the gap between broker-dealer advisers, who are usually compensated by commission, and the RIAs, who generally charge fees based on a percentage of assets, Smith says. That responsibility would be tied to any investment advice they’re providing customers related to retirement plans, particularly rollovers.

The rule addresses the potential conflict of interest tied to commission-based sales. Most of the time, broker-advisers will act in the client’s best interest, “but there are definitely situations where commission-based salespeople could be swayed to recommend something that might lean more toward the adviser’s best interest,” Smith says.

The history of the rule goes back to the Employee Retirement Income Security Act (ERISA) of 1974, according to the DOL. As retirement savings shifted more from employer-sponsored plans to 401(k) and IRAs, the need for sound investment advice grew. While most professionals act in their clients’ best interests, some compensation structures create incentives to direct clients toward particular products, creating a conflict of interest. In 2009, the DOL began working on the new rule to address these potential conflicts, which must be disclosed under the new law.

That’s a win for investors, particularly those rolling over 401(k) plans as they retire. As baby boomers retire, the law has the potential to impact a great deal of investors.

Associated Bank is a trust company and is already held to the fiduciary responsibility, but “we’re really taking an even closer look when we’re making recommendations regarding a 401(k) rollover, in regards to doing more documentation and diving deep into the options that a client has,” Smith says.

Likewise, Wipfli advisers act as fiduciaries, Hayes says. “It changes a little bit in terms of making sure we document more of our recommendations,” he says. “For many investment firms, there’s a higher level of paperwork, due diligence and documentation.”

Employers that offer 401(k) retirement plans will also need to be more diligent, both Hayes and Smith say.

A few years ago, regulations ensured a disclosure of fees for 401(k) plans. The new rule creates more due diligence, Hayes says. “This just makes employers take that next step, where they now need to evaluate the service providers of that 401(k), ensure they’re working for the employees’ best interest, and putting forward appropriate investment options at a reasonable and competitive price.”

Smith says the rule requires all options to be evaluated when reviewing recommendations related to a rollover, including:

• Retaining the account with the employer and reviewing the costs of the previous plan and the investment lineup.

• Rollover costs associated with a new plan (new employer).

• Rolling over to an outside IRA and all fees and costs and included services, such as financial planning.

Sponsors of employer-based plans may provide education around the 401(k), but if they’re making recommendations, they need to know they’re acting as fiduciaries.

“If they’re specifically making a recommendation to that employee, then they’re held to that fiduciary standard,” Smith says.

While there is some uncertainty as to whether the new rule will, in fact, become law as the new administration transitions into office, wealth management firms are proceeding as if the rule will be enacted as planned.

“Certainly, I think everybody is preparing for and getting ready for this change with the expectation that come April, these rules will be around and enforced for a while,” Hayes says.