What the Investment Fiduciary Rule Means for You

The investment fiduciary rule was first introduced by the U.S. Department of Labor (DOL) during the Obama administration in 2016. It mandated certain investment advisors to put their clients' interests ahead of their own. The rule had a wide reach in terms of defining who was and wasn't a fiduciary and held those fiduciaries to strict standards of conduct.

However, the investment fiduciary rule was reversed by the U.S. Fifth Circuit Court of Appeals in 2018. Since then, there has been a slew of new rules that govern the conduct of investment advisors and brokers, including a new version of the fiduciary rule. It's important for investors to understand what being a fiduciary means, as well as who is and isn't one.

Here's what to know about the different rules, who they apply to, and how they impact you as an investor.

What Is a Fiduciary?

In general, a fiduciary is someone who has a duty to act in the best interests of another party. In the case of a financial advisor, an advisor acting in a fiduciary capacity has an obligation to put the interests of their client first when giving advice, as well as in all aspects of the client-advisor relationship.

As a fiduciary, an RIA "must, at all times, serve the best interest of its client and not subordinate its client's interest to its own," according to the SEC.

Broker-dealers, typically registered with the Financial Industry Regulatory Authority (FINRA), are held to different standards. In June 2019, the SEC introduced Regulation Best Interest (Reg BI) for such brokers to hold them to higher standards (closer to the fiduciary level though not as stringent) than they were previously subject to.

What Is the Fiduciary Rule?

The fiduciary rule defines who is classified as a fiduciary and governs what investment advisors do with respect to certain parameters. It says that investment advisors that are fiduciaries must always put their clients' interests ahead of theirs. It is not a prescriptive body of rules. Instead, it offers exemptions to describe what type of transactions are allowed.

Investment advisors and brokers may be compensated for certain investment products they recommend to their clients. This may tempt an advisor to make recommendations for their own financial gain rather than what is best for their client. This is the sort of conflict of interest that the DOL's fiduciary rule tried to address.

After the introduction of Reg BI, the DOL again came up with a proposal for fiduciary standards through an exemption that went into effect on Feb. 16, 2021. This new rule serves to expand the definition of fiduciary advice to include investment advice regarding rollovers from retirement plans like 401(k)s and advice pertaining to individual retirement accounts (IRAs).

This new exemption applies to RIAs as well broker-dealers, banks, and insurance companies, and also to their individual employees, agents, and representatives.

However, this new rule also allows advisors to receive compensation such as commissions, 12b-1 fees, or other mutual fund loads on accounts being rolled over from a 401(k) into an IRA. It also allows advisors to offer advice if it's part of an ongoing relationship or the first step in a new ongoing relationship with the client. This type of compensation was prohibited prior to this exemption.

In order to be compliant with this rule, advisors must: 

• Acknowledge they are a fiduciary under the 1974 Employee Retirement Income Security Act (ERISA)
• Disclose the details of their relationship to their client in writing, including all conflicts of interest
• Comply with the impartial conduct standards prescribed by the DOL
• Provide the client with written disclosure as to why the rollover is in their best interest
• Document why any rollover from a retirement plan to an IRA or from an IRA to another IRA is in the retirement investor's best interest
• Conduct an annual compliance review and document this to the senior executive of the financial advisory or broker firm

Investors should note that this exemption is not a full-fledged fiduciary standard; it only pertains to retirement rollovers and accounts.

What Is the Best Interest Standard?

Reg BI is a regulation that was enacted in 2019 by the SEC. It is enforced by FINRA. Reg BI establishes a standard of conduct for broker-dealers and others who work with clients.

Reg BI includes:

• Acting in the best interests of clients when making recommendations for investments and products
• Avoiding and disclosing any conflicts of interest (even potential ones) to clients
• Documenting why a particular course of action is right for the client and not just for someone in a similar situation

Reg BI also requires brokers and advisors to complete a client relationship summary known as Form CRS. This documents the client's relationship with the broker or advisor, as well as the type of relationship between the client and the firm. It also discloses any conflicts of interest the firm or individual may have that could impact the client, the firm's plans to meet the documentation requirements of Reg BI, and any disciplinary actions against the firm or individual brokers and advisors.

Fiduciary Rule vs. Regulation Best Interest

The best interest standard is similar but still different from a true fiduciary standard. Here's how they differ.

How Does the Fiduciary Rule Impact Individual Investors?

There is no true, all-encompassing fiduciary rule per se. The exemption from prohibited transactions impacts investors working with an advisor or broker and who are looking to roll money over from a 401(k) or similar retirement plan to an IRA. It also impacts those seeking advice on how to invest in an IRA account.

Do I Need a Fiduciary?

If you are looking for an advisor who is required to act in your best interest in all cases, then the answer is yes. All RIAs with the SEC are required to adhere to a fiduciary standard. Reg BI and the new prohibited transaction exemption both fall short of the fiduciary standard.

Reg BI and the fiduciary prohibited transaction exemption are both steps in the right direction. However, advisors working under these rules are generally not true fiduciaries. Investors should take time to understand whether or not an advisor is a true fiduciary and then decide if that advisor is a good fit for their financial situation.