Department Of Labor Ruling
Updated: Jun 16, 2022
A very important new law has been implemented by the Department of Labor which provides new guidance and rules for investment advisors who manage retirement accounts. While some of you may be aware of the vehement opposition to this new law by the large investment banks, we here at MOR Wealth are in full support of this new rule!
Dear Clients & Friends,
Two weeks ago, I mentioned in our monthly risk update that a very important new law has been implemented by the Department of Labor which provides new guidance and rules for investment advisors who manage retirement accounts. While some of you may be aware of the vehement opposition to this new law by the large investment banks, we here at MOR Wealth are in full support of this new rule! Though I had intended to discuss the ruling in greater detail last week, admittedly in the excitement of my sister’s wedding, this letter remained in my email drafts bin. So here we are, and let’s discuss this new policy.
This rule, though complex in its implementation, is quite simple in its logic. Starting in 2017, all professionals giving investment advice to participants of retirement plans (whether corporate plans like a 401k, or private plans such as an IRA) must act in a fiduciary capacity, regardless of whether or not they are actually an accredited Fiduciary.
It’s important that all readers know I am Accredited Investment Fiduciary and therefore have and always will be required to act as such for accounts we work with, not just retirement accounts. Therefore, this long overdue rule doesn’t affect us much at all. Nonetheless, this is an important topic to be aware of given its coverage in the news, and it’s a wonderful opportunity for us to remind our clients that we always try to be ahead of Wall Street, especially when client care is the topic’s essence.
With this new rue, it will be illegal for an investment advisor to put their own interests, or the interest of their firm, ahead of their client’s interests when working within retirement plans. (It’s hard to believe we need a law to explicitly require that!) Previously, the only requirement was that a particular investment be “suitable” for the investor. And while suitability and “best interests” may sound somewhat similar, they are not similar at all; consider the following oversimplified example…
Consider an investment advisor choosing between two investments, a proprietary investment paying a 4% dividend, and a non-proprietary investment paying a 5%. Let’s further assume that the proprietary investment pays the advisor a higher compensation. As long as both of these investments are suitable for the client given their risk profile and long term goals, the advisor could purchase for him/her the proprietary investment, and make more money at the expense of their customer.
This would be highly unethical for an Accredited Fiduciary. On the other hand, if an investment advisor was not a fiduciary, this was acceptable, and alarmingly common; until now! With this new rule, starting in 2017, all advisors working with retirement plans will now be held to the same standard as actual fiduciaries.
(As a side note, in addition to being an Accredited Investment Fiduciary, over 97% of our clients pay a consulting fee which has no correlation of any kind to what investments we choose. In addition, as an independent firm not married to an investment bank, we simply do not offer any proprietary products of any kind.)
Many large investment banks are strongly opposed to this new rule claiming if they can’t maximize their profits, modest size clients will not generate the revenue necessary to be cared for. Accordingly, many large banks claim that this rule will have the reverse effect of its intention, causing many small investors to be dismissed and unable to seek any help at all. I think this is likely complete hogwash. If the largest investment banks truly feel this way, their top execs can afford to take a small salary cut in order to maintain their ability to care for modest sized clientele. According to the New York Times, Jamie Dimon, the CEO of JP Morgan, made $20 million in compensation in 2015. I say, reconsider the compensation packages for your senior staff and realign your commitment to society in general.
In Summary… On April 6, 2016, the Department of Labor (DOL) issued new "conflict of interest" rules regarding financial advice as it relates to retirement plans and IRAs. The new DOL rules generally hold financial professionals to a fiduciary standard if they receive compensation for providing investment advice to retirement plan participants or IRA owners, which means they must act impartially and in their clients' best interests. Below we’ve posted several FAQ’s prepared by Broadridge Investor Communication Solutions, Inc.
What is a "fiduciary" and why does it matter?
"Fiduciary" is a term for an individual who has a legal or ethical duty to act for another's benefit. When a financial professional provides investment advice or recommendations to an IRA owner or an employer-sponsored retirement plan participant, and in doing so receives compensation, the new rules generally hold the financial professional to a fiduciary standard. In other words, the financial professional must put the client's best interest ahead of his or her own. To that end, the rules are designed to eliminate potential conflicts of interest. One example is a situation in which a financial professional would get paid more for one investment product than another, creating a possible conflict when he or she makes a recommendation.
Does that mean sales commissions on investments will be eliminated?
Financial professionals can continue to receive compensation via commission on investment products. Under the new rules, however, certain requirements must be followed if advice provided relates to retirement plans or IRAs, including rollovers to IRAs. For example, if a financial professional provides advice relating to an IRA, there's a general requirement for a contract stating that the financial institution and professional will act as fiduciaries and will provide investment advice that is in the best interest of the client. There are also required disclosures on fees and charges, and on commissions and other transaction-based payments.
Will anything change if a financial professional is being paid a flat fee?
The impact of the rules may be much less obvious if a financial professional is compensated based on a fixed percentage of the value of assets, or on a set fee that does not change based on the particular investments recommended. However, there will be some additional documentation requirements, particularly when any discussion involves a potential rollover of funds to an IRA.
What about general educational materials?
The new rules do not change or limit the ability of financial professionals to provide general investment, financial, or retirement education materials. That includes newsletters; general marketing materials; research reports or news reports prepared for general distribution; and educational pieces on concepts such as risk and return, effects of inflation, and estimating future retirement income needs.
Do the new rules apply to advice that relates to accounts that aren't retirement plans or IRAs?
No. The rules only apply to advice as it relates to IRAs and employer-sponsored retirement plans, such as 401(k) plans. Existing rules will continue to govern the advice provided by a financial professional relating to taxable accounts.
When do the new rules take effect?
Most of the major provisions in the final rules do not take effect until April 2017. Some of the provisions relating to detailed disclosures, policies and procedures, and contract requirements do not go into full effect until January 1, 2018.
Where can I get more information?
The actual rules, as well as explanatory materials, can be found on the DOL website at
If anyone has any questions about this new rule, or its effect on the industry, or even the economy in general, give us a call. We here at MORWM are big supporters of this new rule and we’d love to talk about it with anyone who wants to.
Have a wonderful weekend.
Matthew Ramer, AIF® Principal, Financial Advisor MOR Wealth Management, LLC
1801 Market Street, Suite 2435 Philadelphia, PA 19103 P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300 Vero Beach, FL 32960 P: 772-453-2810
firstname.lastname@example.org | www.morwm.com
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