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Wealth Management


BIDEN EXPANDS THE DEFINITION OF FIDUCIARY ADVICE IN PROPOSED NEW RULE


THE NEW RULE PROPOSED BY THE DOL WOULD CLOSE LOOPHOLES THAT THE BIDEN
ADMINISTRATION SAYS ARE CURRENTLY AGAINST INVESTORS’ INTERESTS.

By Holly Deaton
November 1, 2023
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A new retirement security rule proposed by the Department of Labor is set to
expand the definition of fiduciary advice and redefine which advisors fall
underneath it.



The proposed rule will now cover things like fixed index annuities, advice to
employers and plan fiduciaries, and one-time advice for transactions like 401(k)
rollovers, the Whitehouse said in a statement on Tuesday.



The proposed rule, which is open for public comment, could have far-reaching
consequences for advisors, brokers, plan sponsors, and insurance agents.



The rule will also cut so-called junk fees in retirement products, which the
Whitehouse said will potentially provide billions more in savings for those
preparing for retirement.



“Today’s proposed Retirement Security rule by the Biden Administration expands
protections for retirement savers, ensures sounder financial advice, lowers
investment junk fees, and gives every American saving for retirement greater
peace of mind about their portfolios,” the Whitehouse said.



The proposed rule aims to address a known fiduciary gap to the Employee
Retirement Security Income Security Act, also known as ERISA, the federal law
governing retirement plans. Under the current rule, financial advisors must put
their client’s interests above their own commissions when recommending the
purchase of securities like stocks and mutual funds.



However, one-time recommendations, such as those given by advisors to clients on
rollovers are not required to meet a fiduciary standard currently set out under
ERISA. Current regulations, which were adopted in 1975, also do not cover
advisors’ recommendations to purchase non-securities, like real estate, certain
annuities, or commodities like gold.



Plan sponsors also don’t have to consider their fiduciary duty when deciding
which investments to put on a 401(k) lineup.



“These blind spots in the current rules can increase costs and fees for
consumers, taking a toll on their retirement savings,” the Whitehouse said.



The DOL had previously sought to address the fiduciary blind spot in 2016 but it
was struck down in 2018 as being too broad. The 2016 rule had applied to almost
all paid recommendations to retirement investors.



In 2019, the SEC sought to address similar issues among broker-dealers by
issuing a regulation titled “Regulation Best Interest” or Reg BI as it is more
commonly known. Reg Bi sets a best interest standard for broker-dealers when
recommending securities or an investment strategy involving securities to retail
customers. It has consistently topped the SEC’s exams priority list for the last
two years.



The DOL has proposed two exemptions to help certain advisors and insurance
brokers manage conflicts of interest when giving advice.



The first exemption would allow certain advice, which would normally be
prohibited, if the advice was in the “best interest” of the client. The second
exemption is tailored to independent insurance agents to help them with certain
recommendations.



Reactions across the wealth management industry were mixed.



The Certified Financial Planner Board of Standards, the group in charge of
wealth management’s most popular designation, and the Fiduciary Institute both
came out in support the proposed rule.



“This proposed rule is an important step forward toward improving the retirement
security of all Americans. CFP Board will carefully review the details of the
proposed rule and assess its effectiveness so that all financial professionals
who provide retirement investment advice are required to put the best interests
of their clients first,” the CFP Board said in a statement.



Meanwhile, NAIFA’s (the National Association of Insurance and Financial
Advisors) CEO Kevin Mayeux, said that the organization was disappointed in the
rule.



“This DOL proposal is particularly unfortunate, coming at a time when many
Americans are concerned about their economic security and ability to prepare for
retirement,” Mayeux said. “NAIFA is particularly disappointed that DOL is trying
to saddle advisors and consumers with an additional layer of regulations when
the stated goals of the proposed rule are already being achieved by the
Securities and Exchange Commission’s Regulation Best Interest and state measures
based on the National Association of Insurance Commissioners’ model best
interest regulation for annuity transactions.”



More than 40 states have adopted updated conduct standards recommended by the
NAIC for insurance agents and insurance companies recommending annuities.







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