After months of anticipation and years of debate, the Department of Labor (DOL) “Conflict of Interest Rule” has finally been released.  During the proposal process, the DOL fielded over 400,000 comments, some of which were in opposition to the rule while others were seeking clarification to specific areas within the rule.  The one thing there is little debate about is the intent of the rule.  There may be arguments around the government’s role in this process, or the nuances of what constitutes investment advice, but how do you argue that a rule requiring the industry to act in the best interest of their clients is a bad thing?   This is why at Unified Trust we have assumed a fiduciary role for over 30 years.  We believe that trust needs to be the foundation of everything we do.  As a fiduciary and discretionary trustee, we are bound by law to always act in the best interest of the investor; to be un-conflicted and transparent in our approach; and to operate at a prudent expert standard of care.

The release of the expanded definition of fiduciary is certainly a ‘hot topic’ and we wanted to share our initial thoughts with you.

Potential Impact on Financial Advisors The registered investment advisors (RIAs) that have already been acting in a fiduciary capacity just saw their marketplace get considerably more crowded.  With the vast majority of advisors now being considered fiduciaries, RIAs will be forced to adjust their value proposition to distinguish themselves amongst their competitors.  We believe that the most impactful point of differentiation will be to not only improve outcomes for participants but to quantify those outcomes for the plan sponsors and retirement plan committees.   Some broker-dealer registered reps may need to utilize the ‘education carve-out’ to limit or avoid fiduciary status.  However, the carve-out is going to be narrower than it previously was (per DOL Interpretive Bulletin 96-1) and the education provided under this approach will be limited and may be considered unsatisfactory to many plans.  We believe that the registered reps who wish to stay in the retirement plan industry using the education carve-out will ultimately need to rely on a very strong fiduciary partner to do so (a view shared by notable fiduciary expert Fred Reish in a recent blog post as an evolving “common solution” for 401k-focused registered reps in the wake of the new fiduciary rule).

Potential Impact on Advisory Fees In recent years, fees have been compressing as a result of the DOL’s fee disclosure initiatives and the increasingly competitive nature of the marketplace—something we expect to accelerate under the new fiduciary definition rule.  It’s also highly likely we’ll see increased litigation over the matter.  However, we don’t believe that there will be a bright-line test on fee reasonableness.  It’s analogous to driving a car 60 miles an hour.  That speed may be fine on the interstate, but it could be disastrous on a narrow winding road.  Likewise, a particular fee of 25 basis points may be reasonable or may be extremely overpriced.  It’s not necessarily about the fee but rather what is being done to earn the fee.  For that reason we believe that an advisor’s business model will need to include greater fee transparency, a prudent documentation and monitoring process, and the ability to quantify participant level outcomes.  Advisors that can accomplish this will be in a better position to justify their fees and differentiate their services in a fiduciary environment where everyone is essentially viewed as an equal.

Potential Impact on Compliance Compliance complexity and oversight will greatly increase.  For example, testimony to the DOL indicated in the first year the rule goes into effect financial institutions will have to produce more than 86 million written disclosures and notices.  This does not come without a cost.

Potential Impact on Vendors Many major vendors will be exempt from the fiduciary rule or attempt to structure relationships to avoid fiduciary status under the rule.  This means litigation that develops may be between the plan sponsor and the advisor since the vendors may not be a fiduciary—that is unless you are working with a vendor that is willing to accept fiduciary status.  Unified Trust is not only willing to accept fiduciary status, we sign on as discretionary trustee, and thus a named plan fiduciary, in the plan document for every plan on our platform.

The DOL Conflict of Interest Rule will no doubt have a sizable impact on the industry.  The extent of that impact will unfold over the coming months and years.  We do firmly believe that it will increase the need to have a fiduciary process that is not only accurate but also automated and algorithm-based.  In other words, it won’t be enough to say you’re a fiduciary, rather you will need to show prudent fiduciary processes are in place and in the best interest of the investor.  This is where we can help.  At Unified Trust, we have the fiduciary processes in place to help you drive and quantify outcomes in a sustainable and scalable business model.  The rule has created a level of uncertainty in the industry, but you can be certain in Unified Trust as the trusted fiduciary for your plans.

About Greg Kasten view all posts

Dr. Gregory W. Kasten serves as Founder and CEO of Unified Trust Company. He has published more than 100 papers on financial planning and investment-related topics in various financial and business journals; written two editions of the book Retirement Success. In 2007-2009, Medical Economics listed Dr. Kasten as one of "The 150 Best Financial Advisers for Doctors" in the country. Dr. Kasten was inducted into the Advisor Hall of Fame by Research Magazine in 2011 and in 2013 was named Retirement Plan Adviser of the Year by Employee Benefit Adviser Magazine. He has more than thirty years of investment experience.

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