The Glaring Flaw in the DOL’s New Fiduciary Law

The Department of Labor is essentially saying that fee considerations don’t factor into looking out for the best interest of a client. This is the glaring flaw in the new fiduciary law.

 The White House yesterday, released a fact sheet touting the benefits of newly implemented fiduciary standards designed to protect retirement savers and retirement plan sponsors from costly practices employed by many brokers and advisors. Click herefor the full release and see my previous post detailing why the reform is needed.

 The new law created by the Department of Labor, while well intended, falls short of the sweeping reform it claims to be. Subsequent amendments to the originally proposed law include some noticeable exemptions. Exemptions that leave the consumer exposed to the same sales practices the law purports to protect them from. Most prominently is the “Best Interest Contract” exemption.

“BIC” Exemption

In short, the exemption enables an advisor to continue to receive “most common forms of compensation”, such as sales loads and commissions, when recommending an investment. The advisor is simply required to disclose the conflicts of interest to the investor and show that the investment is in the client’s best interest. The trouble is that considerations of fees are inexplicably excluded from the Department of Labor’s definition of “best interest”.

 The reality of the “BIC” exemption suggests there won’t be any real material change to the sales practices used by commission based brokers and advisors. What has changed is the broker can now legally tell their client they are a fiduciary, looking out for their best interest, all while charging excessive fees for poor performing investments.

 The Contradiction

The White House release boasts that the new law will crackdown on a “broken regulatory system that allows misaligned (broker) incentives to steer customers into investments that have higher fees or lower returns.” A system that has dragged down returns on retirement savings by an average of 1%, taking an estimated $17 billion out of the pockets of retirement investors every year.

In stark contradiction to the spirit of the new law, Labor Secretary, Thomas Perez admitted to reporters that, “Best interest does not mean the lowest priced product.”  The Department of Labor is essentially saying that fee considerations don’t factor into looking out for the best interest of a client. This is the glaring flaw in the new fiduciary law. 

Our Conclusion

The new fiduciary standards contain some meaningful reform, which will hopefully prove to be of some benefit to consumers. While a step in the right direction, it by no means absolves consumers from their responsibility to understand the investments they own and how their advisor is being compensated.

We maintain that the best way for individual retirement investors and retirement plan sponsors to look out for their best interest is to utilize independent Registered Investment Advisors that receive no commission or other forms of compensation from investments that they recommend.

Profolio Investments, Inc. is a Registered Investment Advisor located in Jersey City, NJ. We provide wealth and retirement planning for individuals, small businesses, and retirement plan sponsors.

Michael Scheel

Profolio Investments Inc, 121 Newark Avenue Ste 544, Jersey City, NJ, 07302