The Department of Labor has released its proposed replacement for the definition of "investment advice fiduciary."
Under the proposal, a financial services professional would be classified as an investment advice fiduciary if (1) the provider offers investment advice or makes investment recommendations to a retirement investor, (2) for a fee or compensation and (3) the financial services provider makes the recommendation within a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in the investor's best interest.
Generally, the relationship prong may be based on the providers (1) having discretion over investment decisions for the retirement investor, (2) making investment recommendations to investors on a regular basis as part of their business, or (3) stating that they are acting as a fiduciary when making investment recommendations.
We asked two professors and authors of ALM's Tax Facts with opposing political viewpoints to share their opinions about whether the DOL's newly proposed fiduciary rule changes would have a negative impact for retirement investors.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Byrnes
Bloink
Their Reasons:
Byrnes: This new standard will greatly expand the reach of the fiduciary standard. This proposal effectively guts the "regular basis" prong of the existing five-part test. By doing so, the DOL will impose fiduciary liability on advisors who don't have any real advisor-client relationship with certain individuals. If anything, the expanded fiduciary status will simply lead advisors who aren't otherwise covered by the fiduciary definition to avoid making those types of recommendations.
Bloink: The standard for determining who is an investment advice professional should not be conditioned on whether advice is provided to one particular retirement investor on a "regular basis." Some of the most important advice that retirement investors and small business retirement plan sponsors receive is on a one-off basis. The focus absolutely should be expanded to home in on whether the retirement investor should reasonably expect fiduciary protections to apply — regardless of how frequently the investor interacts with the advisor.
Byrnes: We have to admit that this proposal will have a significant and negative impact on advisors who have been relying on prohibited transaction exemptions for years. The proposed amendments would sharply limit the availability of these exemptions — making it much more difficult for advisors to be compensated fairly for their work without making significant modifications — and, yet again, remembering that this is the third fiduciary standard we've seen in less than a decade.
Bloink: Consider the situation where a small business owner is "sold" a retirement plan or an investor is given advice to roll the entire balance of a retirement plan into another account. These are critical pieces of advice, and investors should be able to expect that the advice is in their best interest and subject to fiduciary protections. These are very often some of the most important investment decisions that individuals and small business owners ever make, and they should reasonably expect that fiduciary protections will apply.
Byrnes: In the end, these proposed changes will result in a system where ordinary, middle-income Americans will lack access to quality investment advice because of the increased costs incurred by advisors. It just won't be worth it for advisors to take on cases where an individual is looking for quality advice on whether to roll over retirement funds. Because these are the investors who need quality retirement investment advice the most, the new proposed changes will almost certainly have a chilling effect on the retirement savings market.
Bloink: Yes, advisors will likely have to make some modifications to qualify for exemptive relief. However, the bottom line is that the retirement savings industry has changed. The governing law must change along with it — and the most important factor to consider is whether retirement investors are protected from conflicted advice.
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Byrnes 
Bloink 
