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DOL Unveils Fiduciary Rule Allowing Commissions and Non-Traded Investments

The final version of the Department of Labor’s controversial fiduciary rule was published this morning, and as expected, requires those providing retirement investment advice to adhere to a more rigid fiduciary standard than what was originally defined under the Employee Retirement Income Security Act of 1974.

Unexpectedly, however, the Department of Labor revealed a more streamlined and balanced version of the rule than what was anticipated. Advisors will not be prohibited from recommending commission-based investment products, such as non-traded REITs and BDCs, for their clients’ retirement accounts as long as the recommendation is in the clients’ best interest.

According to the DOL, the new rule “reduces the compliance burden and ensures continued access to advice, while maintaining an enforceable best interest standard that protects consumers.”

As expected, a fiduciary includes anyone who receives a fee or other compensation for providing investment advice or recommendations for individual retirement accounts or rollovers. This can include what assets to purchase or sell and whether to rollover from an employment-based plan to an IRA. A fiduciary can be a broker, registered investment advisor, or other type of advisor.

“We are pleased that the Department of Labor’s final rule, and in particular its companion best interests contract exemption, will no longer preclude a financial adviser from recommending important alternative investments to their retirement saver clients solely because these investments pay a commission or other variable compensation,” said John Grady, Chairman of ADISA’s Legislative and Regulatory Committee.

However, he added that “the rule as adopted will present enormous challenges to independent broker-dealers and other financial advisers who provide critical advice to retirement savers. As we have maintained throughout, the rulemaking effectively promotes the fee-based approach to providing advisory services, an approach that we continue to believe does not operate well for many Americans, and particularly for middle class and younger savers with smaller retirement account balances.”

The best interest contract exemption, which critics feared would be excessively complex and onerous, allows advisors to recommend commission-based products if they “commit to putting their client’s best interest first, adopt anti-conflict policies and procedures (including avoiding certain incentive practices), and disclose any conflicts of interest that could affect their best judgment as a fiduciary rendering advice.”

“Industry practitioners said they were worried they would have to put the BIC in place from the very first second they were introduced to a potential new customer, even if that individual never ended up working with the firm or purchasing a service or product,” said Labor Secretary Thomas Perez. “Now we have confirmed that the contract can be papered at the same time as all the other paperwork associated with a new purchase or a new client relationship. It’s then and only then that you will have to execute the BIC, which can be as simple as a page or even a paragraph added to existing documentation.”

The contract will disclose the fees, compensation, and material conflicts of interest associated with the recommendations. However, advisors are no longer required to provide clients with an annual disclosure of total costs of the investment over time, and the burdensome multi-year projections relating to the impact of fees on an investment were also eliminated.

As for the timeline, the DOL implemented a phased approach and extended the implementation from eight months to one year. The full compliance disclosures won’t go into effect until January 1, 2018.

While the industry has been on the edge of its seat waiting for the new rule to be released, many firms have proactively changed their business structures in anticipation. Broker-dealer giant AIG recently sold its Advisory Group to Lightyear and PSP Investments, while LPL announced lower fees and account minimums in anticipation of the new fiduciary standard.

Last month, the U.S. Chamber of Commerce said that it was prepared to sue the federal government if the final rule proved unworkable.