The Fiduciary Rule: New DOL Definition

On Tuesday, April 23, 2024 the Department of Labor (DOL) released the Retirement Security Rule: Definition of an Investment Advice Fiduciary. Dubbed the "Fiduciary Rule," this regulation expands the definition of a fiduciary, thereby imposing stricter standards on financial professionals who advise on retirement accounts. The revised definition will come into effect on September 23, 2024. For sophisticated investors, understanding the implications of this rule is crucial for navigating future investment strategies and advisor relationships.

What Is The Fiduciary Rule?
The purpose of the Fiduciary Rule is to guarantee that all financial professionals who provide advice on retirement savings and plans prioritize the best interests of their clients over their own personal or corporate gains. This regulation effectively closes existing loopholes that have allowed advisors to recommend investments based on potential compensation rather than what is truly beneficial for their clients. By implementing this rule, the aim is to safeguard retirement savers from biased advice that could negatively impact their savings, potentially leading to delayed retirement, reduced standard of living, or even premature depletion of funds.

The rule and amended PTEs (Prohibited Transaction Exemptions) aim to protect retirement investors by establishing strict requirements for trusted advisors when making investment recommendations. Under the final rulemaking, advisors will:

Provide advice that meets a professional standard of care (by offering prudent advice);
Prioritize the retirement investor's best interests over their own financial interests (by providing loyal advice);
Refrain from making misleading statements regarding conflicts of interest, fees, and investments;
Charge no more than a reasonable amount for their services, and
Provide essential information about their conflicts of interest to retirement investors.

Is Your Advisor A Fiduciary?
According to the Department of Labor, the current definition of an investment advice fiduciary was adopted in 1975 when IRAs were less prevalent and before the origination of 401(k) plans. Understanding whether your advisor is considered a fiduciary under the new rule is crucial in evaluating the objectivity of the advice you receive. Visit investor.gov to see your advisor's registration status. Here are the differences you will see:

Investment Adviser: This registration means your financial advisor is legally obligated to act as a fiduciary only and always.
Registered Broker and Investment Adviser: These dually registered professionals can switch between offering "suitable" and "fiduciary" advice. They may ethically want to act in your best interest, but if acting as a broker, they are not held to that legal standard. The only way to know which hat they are wearing at the time of the advice is if you ask.
Registered Brokers: Regulated by FINRA (Financial Industry Regulatory Authority), brokers are not regulated by the SEC (Securities and Exchange Commission) and, therefore, are not considered fiduciaries.
Unregistered: If you do not see your financial advisor listed on investor.gov, conduct further inquiry to understand how he or she is regulated and determine his or her fiduciary status.

The new rule considers your advisor an "investment advice fiduciary" if they provide a recommendation in one of the following contexts as quoted directly from the rule posted on the Federal Register:

Makes investment recommendations to investors on a regular basis as part of their business and the recommendation is made under circumstances that would indicate to a reasonable investor in like circumstances that the recommendation.
Is based on review of the retirement investor's particular needs or individual circumstances,
Reflects the application of professional or expert judgment to the retirement investor's particular needs or individual circumstances, and
may be relied upon by the retirement investor as intended to advance the retirement investor's best interest; or
The person represents or acknowledges that they are acting as a fiduciary under Title I of ERISA, Title II of ERISA, or both with respect to the recommendation.

The final rule applies only to recommendations offered in exchange for payment or other forms of compensation, whether direct or indirect.

Investment Strategy Review
The objective of the Fiduciary Rule is to ensure that retirement investors' reasonable expectations are respected when they seek advice from financial professionals who present themselves as trusted advisors. If you determine that your current advisor is not a fiduciary, you may need an independent investment strategy review. Products like annuities traditionally have hidden fees and commissions, and a fiduciary may be able to find you a low-cost alternative.

For over two decades, the fiduciary financial advisors at Hurlow Wealth Management Group have helped clients find clarity, feel confident, and achieve comfort in retirement. Schedule an introductory call today if you want a second opinion on your retirement plan or seek a trusted fiduciary relationship.