Navigating the DOL Fiduciary Rule

By Andrew K. Sledd, CPA, CFE, Partner

Navigating the DOL Fiduciary Rule

By Andrew K. Sledd, Business Assurance & Advisory Services Senior Manager | Financial Services Industry Team

In April 2016, the Department of Labor (DOL) issued its final rule expanding the investment advice fiduciary definition under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL also updated the list of prohibited transaction exemptions for types of investments activities broker dealers and registered investment advisers (RIA) execute on behalf of ERISA accounts.  Collectively, these changes have been coined the Fiduciary Rule.

The impact of the Fiduciary Rule is far reaching affecting all participants in the retirement plan industry from broker dealers and RIA’s to businesses that offer retirement plans to employees and ultimately the retirement account holder themselves. This rule is one of many post-“great recession” measures the federal government has enacted placing more responsibility on investment advisers in lieu of retirement account holders. The primary objective of the Fiduciary Rule is to eliminate the estimated $17 billion in annual fees the federal government has deemed as exorbitant and above the reasonable compensation an adviser should receive for ERISA account management.  The DOL is also seeking to require advisers to place their clients’ best interest over their own by eliminating higher commissions products from qualified client accounts. While commission products are not completely eliminated with the Fiduciary Rule, it will require advisers to have clients sign a best interest exemption (BICE) in order to keep commission based products in their clients’ retirement portfolios.

The industry players that are expected to experience the most change and require the largest overhaul of their business models and practices are broker dealers and insurance companies. A significant portion of these companies’ revenues are earned through commissions generated from certain investments held in qualified accounts. The investment class that is most vulnerable and will require significant fee restructuring appears to be variable and indexed annuities that often bear commissions in the 4% to 7.5% range.

The impact is already being quantified as seen by the reducing number of broker dealers.  In February 2016, ThinkAdvisor examined the number of broker dealers that had begun to close shop due to the pending Fiduciary Rule as well as other regulatory changes to SEC Rule 17a-5.  The results are staggering with a 12% decrease in total broker dealers from 2010 to 2015. For a full analysis of the acceleration of broker-dealer closings see ThinkAdvisor’s article DOL Fiduciary Rule Will Accelerate Broker-Dealer Closings.

The industry participants that stand to benefit the most from the Fiduciary Rule are RIAs and retirement account holders. RIA’s have been required to operate in the best interest of clients for sometime now and stand to gain more business as retirement accounts are transitioned to fee based products and management. Account holders will certainly benefit from reduced fees and commissions thus increased account performance which embodies the spirit of the Fiduciary Rule. However, the DOL and retirement account holders should remain mindful of the old adage “you get what you pay for”.  Reduced fees could lead to less value in the advice, service and management that advisers and fund managers provide to the industry.  As the DOL Fiduciary Rule is implemented over the next 18 months expect to see more advisers moving their retirement clients from commission products to fee based accounts until lower cost commission based products become available.

Question on this topic? Contact your Keiter representative or Email | 804.747.0000.

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About the Author

Andrew K. Sledd

Andrew K. Sledd, CPA, CFE, Partner

​​Andrew specializes in auditing broker/dealers in securities, non-registered investment funds and registered investment advisers. He is a member of the Firm’s Financial Services Industry team and possesses a comprehensive understanding of SEC and FINRA rules and regulations. Read more of Andrew’s insights on our blog.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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