On April 6th the US Department of Labor (DOL) expanded its 1975 definition of “fiduciary” for the first time in more than 40 years to include those who are not fiduciaries under the existing rule.
Previously, brokers or agents could hide behind the Suitability Standard which allowed them to sell financial products to their customers which were classified as “suitable”. Some of these products had very high commissions and hidden fees. The Fiduciary Standard calls for advisors to be held to a higher standard, and to be legally obligated to act in the clients’ best interest.
Accounts affected by this new rule include: 401(k), 403(b), IRAs (Traditional, Roth, SEP, Simple), Archer medical savings accounts, Health savings accounts, Coverdell education savings accounts.
What this means is that every financial advisor who deals with retirement accounts must now become a fiduciary and may receive compensation only from retirement clients. Previously, they were permitted to receive commissions and compensation from mutual fund companies and others through the “back door”.
Under the new law, charging commissions on transactions in retirement accounts will now be a Prohibited Transaction, and there can be no hidden fees. Companies may continue to engage in these prohibited transactions by relying on a “Best Interest Contract Exemption.” What this means is that advisors who wish to charge commissions on retirement accounts may only do so after having the client agree in writing that it is in their best interest. If you have any of these type accounts with advisors, other than Vantage, you may be asked to sign one of these contracts.
Terms like “fees” and “fiduciary standard” will dominate the financial discussion in the coming months, and consumers will be surprised to learn that their interests have not been protected in this manner before now. We don’t doubt that many commissioned advisors have dealt honorably with their clients, but now they will all be legally required to do so.
At Vantage Advisors our response is: It’s about time! We have always operated as fiduciaries, and this new law will have little to no effect on how we do business. We have always acted in our client’s best interest, and will continue to do so.
Rollovers from a 401(k) to an IRA will now need to be facilitated by a fiduciary advisor or by the investor directly.
We will be forwarding you additional information on this subject in the near future. However, if you have any questions we always welcome your call.