Financial Advisors Owe Fiduciary Duty to Retirement Savers Under New DOL Rule

The rule issued in early April 2016 by the U.S. Department of Labor (“DOL”) will require financial advisors and financial firms that handle retirement accounts to act in their clients’ best interests and to disclose conflicts of interest.  This is a higher bar than the current standard, which requires financial advisors to make investment recommendations that are suitable for the investor, in light of the investor’s financial portfolio, need for liquidity, and various other factors. Under the new rule, all fees generated for the financial advisor or the firm itself would need to be disclosed to the customer before the product is sold.

Recent analysis by the President’s Council of Economic Advisers (“CEA”) reflects an estimated $1.7 trillion of individual retirement account (“IRA”) assets were invested in products that generally provide payments which generate conflicts of interest.  The CEA estimates that the corresponding aggregate cost of conflicted advice costs American middle class families one percentage point, or $17 billion, annually.  On an individual level, for example, an investor who has $100,000 in retirement savings at age 45 would grow his or her savings to approximately $179,000 by the time he or she reaches age 65 if the individual were receiving conflicted investment advice, compared to the approximately $216,000 the investor could earn by age 65 if he or she received non-conflicted advice.

The rule will take full effect on January 1, 2018. While the DOL stated it expects the rule to “minimize the compliance burden and ensure ongoing access to advice, while maintaining an enforceable best interest standard that protects investors,” many industry players disagree because they believe the cost of implementation and execution far outweigh any benefit the rule may provide, among other reasons.  Proponents of a strict fiduciary standard also oppose the new DOL rule, citing too many industry concessions from the DOL’s prior, more stringent version of the rule.

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About Christine Goodrich

Christine E. Goodrich is a Senior Associate with Faruqi & Faruqi, LLP’s New York City office.  Ms. Goodrich’s practice is focused in securities arbitration, litigation and regulation.

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