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How Are Firms Preparing for the DOL's New Fiduciary Rules?

By Casey C. Sullivan, Esq. on October 21, 2016 2:11 PM

In April, the Department of Labor finalized rules for financial advisors handling retirement accounts, requiring, for the first time, that broker-dealers and financial advisors act in the best interests of their clients. Choosing suitable investments will no longer be enough; there's now a fiduciary duty to "put the customer first."

So, how are firms preparing for the change? With lawyers. Lots of lawyers. (And a bit of retraining on the side.)

Lawyer Up

The new rules, which go in to effect in April, 2017, provide three general paths for compliance. Firms can choose to serve as a fiduciary under ERISA and use level fees rather than commissions, they can use the "Best Interest Contract Exemption," allowing them to obtain prohibited compensation if they meet certain safeguards and conditions, or they can stop handling retirement accounts altogether.

But financial firms aren't deciding which way to go on their own. The new regulation has been a boon to ERISA attorneys and compliance consultants, according to Thomson Reuters Regulatory Intelligence, with companies spending millions of dollars in preparation for the new regulation. For example, by August, the brokerage firm Edward Jones had already spent $25 million to prepare. It expects to pay at least $50 million more before the rule goes in to effect.

Education and Crossed Fingers

Preparation, of course, involves more than just the advice of outside counsel. Broker-dealers and financial advisors will need significant retraining and oversight in order to ensure compliance.

"I think training will be a huge, complex component related to this particular initiative," Paul Sankovich, chief compliance officer at Wells Fargo Advisors Financial Network, told Financial Advisor magazine in March. A host of training options are available or forthcoming, promising to help brokers and advisors come to grips with their new fiduciary role.

Even as companies move ahead on complying with the new rule, some are hoping it gets knocked out in litigation. A flurry of lawsuits were filed after the rule was finalized. The first challenge was heard in D.C. District Court in August. The Judge in that case, Judge Randolph Moss, is still considering whether to enjoin the rule's implementation.

Need to beef up your compliance team? Post the job for free on Indeed, or search local candidate resumes.

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