The U.S. Department of Labor announced important new rules on April 6, 2016, that will impose fiduciary responsibilities on investment professionals managing retirement accounts, or investments that may be part of retirement funds.
When consumers hear the advertising of investment firms promising that the customer always comes first, they assume the individuals and firms investing their money are professionals, operating under the same legal and ethical standards as a doctor or lawyer — the obligation to provide advice most advantageous to the customer.
However, investment professionals are legally required only to recommend “suitable” investments, a much lower standard that does not require them to act as fiduciaries. As a result, investment advisers and brokers have rarely been penalized for placing a customer in, for example, an expensive mutual fund that pays higher commissions to the adviser, when an otherwise identical fund charging lower fees would be an equal or better alternative for the customer. As a result, conflicts of interest are created between the investment advisers’ financial incentives and their customers’ investment returns.
Those conflicts of interest will be prohibited with respect to retirement investments when the new rules become effective next year (or whenever potential court challenges to the rules are resolved).
Final Rule: “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice” (to be published in the Federal Register on April 8, 2016, 29 CFR §§ 2509 – 2510.
U.S. Department of Labor Fact Sheet on Proposed Definition of the Term “Fiduciary” (links to proposed rule, hearings, and comments).
“Labor Department Rule Sets New Standards for Retirement Advice,” Jonnelle Marte, The Washington Post, April 6, 2016, https://www.washingtonpost.com/news/get-there/wp/2016/04/06/labor-department-rule-sets-new-standards-for-retirement-advice/