The Department of Labor (DOL) has issued a new rule for tax-advantaged retirement accounts. Potentially, the rule affects anyone who has an IRA or a 401(k) account. It also impacts IRA rollovers, and any investment recommendations that may be made pertaining to distributions from IRAs and 401(k)s.

Under the new rule, any financial services industry professional who makes investment recommendations to employees participating in a 401(k) plan, employers who sponsor a 401(k) plan, or IRA owners in exchange for compensation, will be considered a fiduciary.1

Generally, they are two types of advisors: brokers, mostly accepting commissions, and RIAs, or Registered Investment Advisers. The new rule attempts to bridge the divide and both are now expected to act as fiduciaries.

The DOL has expanded the definition of “fiduciary” to reduce the chance of conflicts of interest affecting relationships between financial professionals and investors. Particularly, it wants to diminish any potential conflict that may emerge related to the possibility of a commission from an investment transaction.

Because of the new rule, many financial professionals will be encouraging you, their clients, to enter in a fee-based advisory relationship. In such a relationship, financial advice is provided to the client only in exchange for an advisory fee. That fee may be hourly, it may be per-project, it may be a quarterly or yearly retainer fee, or it may be an annual fee equivalent to a tiny percentage of your account value.

Fees are poised to rise as consequence of the new rule, because insurance costs for financial services firms may be driven higher. Investment firms may potentially face an added compliance burden, and along with that burden, an increased possibility for litigation. Still, the financial industry has been transitioning toward a fee-based business model for years, and it is a business model that many investors have come to appreciate.

If you have already agreed to a fee-based advisory relationship with a financial professional, that person may be acting as a fiduciary for you right now. In doing so, he or she accepts a distinct, legally binding obligation to manage assets on your behalf.

In the near future, if you would like to receive investment advice, investment appraisals, or investment management recommendations pertaining to an IRA or a 401(k) plan account, or regarding a rollover or distribution of assets from one of these tax-advantaged retirement accounts, your broker may generally be able to do so under one of two conditions:

*You agree, in writing, to a fee-based advisory relationship with the financial professional who will be working with you.

*You agree, in writing, to a commission-based fee structure through a Best Interest Contract. This is an agreement that you, and the financial professional working with you, must both sign. The Best Interest Contract (BIC) puts the financial professional’s commitment to act in your best interest in writing.

The BIC obligates the financial professional to act as a fiduciary on your behalf, and directs you to a disclosure website where both the costs of the financial advice offered to you, and the potential conflicts of interest in the advisory relationship, are disclosed.2,3


Various investment firms are now making decisions as to how to structure their retirement account businesses in response to the new rule change. Some, like Merrill Lynch, say they “…will no longer give retirement savers the option of paying a commission for trades, a wholesale exit from the traditional Wall Street sales model in accounts that stand to be affected by new conflict-of-interest rules on retirement accounts.” 4 As for State Farm, they have “…directed 12,000 of its agents around the industry who are licensed to sell securities to no longer provide their clients with mutual funds, variable annuities, and other investment products.”5

Still, others are moving forward with new “robo-advisor” solutions where, essentially, a computer based software produces investment allocation advice. Can computers, via automated investment services, replace financial advisors? That remains to be seen, but probably not for a while, since today’s retirees may not be all too comfortable with this new technological aspect of the investment industry.

How may this affect you?

If you are a small investor, you may be best suited with the Best Interest Contract Exemption, if one is offered by the company that oversees your retirement funds, as it may be most cost effective. The same may be true if you are generally a “buy and hold” investor, or if you trade infrequently. Otherwise, you may need to enter in a new, a fee-based, advisory relationship.

What is still unknown is the treatment of existing mutual fund IRA accounts, especially the accounts where a commission was paid to acquire them, and which also pay a small service fee to the broker (12b1 fee). Will these accounts be grandfathered in, or will they have to be transferred? Hopefully the DOL will clarify soon. In any case, the compliance period starts with the BIC exemption on April 10th, 2017 and full compliance is required by January 1, 2018.

I fear that this newest DOL rule will have side effects. For one, small investors may get pushed out from live, personal financial advice, into a computer based “robo-advisor” model. Potentially, higher litigation and compliance costs may force advisors to require an account relationship minimum, for example $100,000 or more.

Arthur Dolega, CFP
Wealth Manager
Vision Financial Planning
6348 Alderton Street
Rego Park, NY 11374
718 205-2880

Securities and Investment Advisory Services offered through NEXT Financial Group, Inc. MEMBER FINRA/SIPC
1 – [4/8/16]
2 – [4/6/16]
3 – [4/11/16]
4 –
5 – “Why State Farm agents are getting out of the investment game” [9/4/16]