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A Client’s Best Interest: What to Know About the New Department of Labor Rule

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December 2, 2016
Trust: Dept of Labor Fiduciary Rule

Description:  The new Department of Labor Conflict of Interest Rule requires those servicing your retirement plans (including IRAs) to act in your best interest when they are providing investment advice for a fee or other compensation. The rule seeks to address retirement advice conflicts of interest at virtually all types of financial services firms, including both broker-dealers and registered investment advisors (“RIAs”).  

Starting next April, it should become official: When providing investment advice for a fee or other compensation to retirement account clients, the financial services industry will be required by the Department of Labor Conflict of Interest Rule to provide advice with their clients’ best interests in mind.

Brokerage firms have long been operating under standards designed to ensure their recommendations were based on clients’ needs, risk tolerance and other suitability considerations.  Registered Investment Advisers (RIAs) have long operated under the Investment Advisers Act of 1940 fiduciary standard. The Department of Labor (DOL) recently decided to take things a step further by adopting its new rule. Among other things, the rule has broadened the definition of “fiduciary” investment advice to include a wide array of interactions with retirement clients that didn’t constitute investment advice under the prior DOL guidelines, including advice about rollovers to IRAs.  

The rule addresses potential conflicts of interest that can arise when investment advice is being provided to retirement account clients. The DOL's goal for the rule is to provide stronger protections for those who wish to build and protect their retirement nest eggs.

What is the New Rule and How Did it Come About?

Selecting and managing retirement investments in plans and IRAs can be challenging, so many turn to professional advisors for assistance. The DOL, the federal agency that oversees retirement plans, is trying to protect investors from conflicted investment advice in their retirement accounts. Clients who are purely self-directed will see minimal impacts.

“It is important to keep in mind that many financial advisors hold themselves to high professional standards,” the Council of Economic Advisers of the President of the United States noted in a report last year relating to the Rule. “However, financial advisors are often compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the advisor’s bottom line.”

The rule takes into account that brokerage firms and RIAs may have conflicts of interest in their retirement-related investment advice activities. To address these possible conflicts, they’re allowed to enter into Best Interest Contracts with their clients in accordance with the Rule’s Best Interest Contract Exemption (“BICE”).  The BICE permits firms to continue to use many current compensation and fee practices, as long as they meet specific conditions intended to ensure they disclose and mitigate conflicts of interest and provide investment advice that is in the best interests of their retirement clients. If financial institutions don't adhere to the standards established in the exemption, retirement investors will have a contractual way to hold them accountable, the DOL notes. The rule will apply to broker-dealers, investment advisors and insurance agents, among others.

The BICE also requires financial services firms to outline the services they provide and the costs for each service, something designed to prevent advisors from receiving incentives for putting the firm’s interest first rather than the client’s.  The DOL hopes the rule will lead to better investment results and lower costs for retirement investors.

How Does the New Rule Affect Investors?

TD Ameritrade has long advocated for the interests of small investors, and plans to act in accordance with the rule when providing investment advice to retirement investors. Even before the new rule takes effect, TD Ameritrade is adding more tools and education to provide additional guidance and advice offerings. These include free goal planning and a new automated investment service from TD Ameritrade Investment Management, LLC called Essential Portfolios. The idea behind this is to help clients make objective decisions in their best interests at a low cost.

Also, all of the RIAs who do business with TD Ameritrade already have been legally bound to act in their clients' best interests as fiduciaries under the Investment Advisers Act of 1940. They will, however, need to adjust their retirement advice activities to the higher rule standards.

Companies in the financial services industry are beginning to make changes to the fees and commissions they charge clients and shift their advice, service, and product offerings. TD Ameritrade is among the companies taking steps to be even more transparent, including instituting new guidelines to handle the ways it offers products to clients. While these changes may sound somewhat complex, the goal is to ensure the best possible client experience – part of TD Ameritrade’s benchmark commitment to make clients its top priority. Indeed, a portion of every TD Ameritrade employee’s compensation is actually based on the satisfaction of their clients.

“As TD Ameritrade looked at how to best comply with the DOL rule, which we were well-positioned to do from the start, we approached it in a client-first way to balance our risk while preserving as much of the client experience as possible,” said Tom Bradley, president of Retail Distribution, TD Ameritrade. “Rather than take away services from our clients, we plan to give them more tools and education and shift our model a bit to provide more guidance and advice. We will also offer a wider range of solutions for investors of all abilities and sizes. These include various ways to have relationships with knowledgeable people at our branch locations across the country, on the phone and online.”

Getting clients on track financially and helping them meet their goals are at the heart of TD Ameritrade’s mission, which is why the firm makes it easy to develop relationships with knowledgeable people at more than 100 branch locations. TD Ameritrade’s financial consultants take the time to understand clients’ needs and goals, helping them pursue their investment objectives.

Bradley added that the new fiduciary standard for retirement investment advice serves as a convenient reminder to proactively manage retirement goals and focus retirement plan structure on pursuing those goals. Whether you sit down with, or just call your TD Ameritrade financial consultant, this rule change can be an opportunity to review your plan and make sure you’re on track. 

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