Secretary Perez and the DOL are not LOL'ing Around

The term “conflict of interest” describes a situation where a person is in a position to derive personal benefit from actions or decisions made in their official capacity.  The trick is for the individual to be able to discern if a conflict of interest exists.  So, how should one go about this process?  In our business, where people make a living giving financial advice or recommending financial products, we like to address potential conflicts of interest by asking one simple thing, ”How is everybody getting paid?”  When you truly understand how people / companies are being compensated, you then begin to understand their true motivations or potential conflicts of interest.  In the case of investment advice, the conflict centers around the question of “is the advice or recommendation in my (the client’s) best interest?”

With this as a backdrop, the Department of Labor (DOL) has recently been very concerned about the advice and subsequent recommendation that individuals saving for retirement have been given.  Over the past five years Congress has been looking very closely at retirement plans and retirement accounts and recently enacted a new law addressing advice, recommendations, and disclosure requirements to uncover who’s “best interest” is being looked after.

In a recent article from Think Advisor, Labor Secretary Thomas Perez stated that “putting clients first is no longer a marketing slogan, it’s the law”.  He went on to add, “With the finalization of this rule, we are putting in place a fundamental protection into the American retirement landscape. … A consumer’s best interest must now come before an advisor’s financial interest. This is a huge win for the middle class.”  

This statement came on the heels of the April 6th DOL rule to amend the definition of “fiduciary” with regard to retirement advice.  You might be thinking, “fiducia - what?”  The idea of a fiduciary is simply this: an advisor who has a relationship with a client that is based trust.  Now let’s take this idea of a fiduciary to a practical level.  The goal of the DOL was to make sure that any advice or recommendation given is solely for the benefit of the client, and not the advisor.  In other words, the DOL is not merely asking, but demanding to know, “How is everyone getting paid?” 

This rule now requires a “Best Interest Contract” between advisor and client that allows the client to better understand the scope of services, the advice given, and, yes, the fees associated with those recommendations.  This is quite a departure for banks, brokerage houses, and insurance firms.  Until now these firms did not fall under the fiduciary standard of care.  This will be especially important as more and more “baby boomers” begin moving their retirement savings from 401(k) plans into individual retirement accounts (IRAs).  The DOL has essentially expanded the fiduciary standard to anyone giving a retiree financial advice that involves a specific recommendation to change what they are doing now.

These new rules around the Best Interest Contract will be phased in between now and January of 2018.  Requiring advisory firms to act in the best interest of the client seems to make a whole lot of sense to us.  What also makes sense is to know how everybody gets paid.  We believe that this is a very fair question that certainly goes a long way to helping a client identify potential conflicts of interest.  Not bad, DOL.