This story was originally published by Investopedia.

With so much in flux around the fiduciary rule ― Will the Department of Labor rescind it? Will the SEC create its own standard? Will Congress intervene? ― advisors could be forgiven for being uncertain about where things stand.

Here then, is a breakdown of the essentials, from where the industry has been to where it's going next.

The Department of Labor's fiduciary rule was originally scheduled to be phased in from April 10, 2017 to January 1, 2018. Full implementation of the remaining elements of the rule has been pushed back to July 1, 2019. The Labor Department, meanwhile, is conducting a review that President Trump ordered earlier this year.

The rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974. If this sweeping regulation (1,023 pages in length) is not stopped outright, it will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, bound legally and ethically to meet the standards of that status. While the new rules are likely to have at least some impact on all financial advisors, it is expected that those who work on commission, such as brokers and insurance agents, will be impacted the most.

BREAKING DOWN THE FIDUCIARY RULE
The Labor Department's definition of a fiduciary demand is that advisors act in the best interests of their clients, and put their clients' interests above their own. It leaves no room for advisors to conceal any potential conflict of interest, and states that all fees and commissions must be clearly disclosed in dollar form to clients. The definition has been expanded to include any professional making a recommendation or solicitation — and not simply giving ongoing advice. Previously, only advisors who were charging a fee for service either hourly or as a percentage of account holdings on retirement plans were considered fiduciaries.

Employee adviser fiduciary J.D. Power

Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts. Suitability meant that as long as an investment recommendation met a client's defined need and objective, it was deemed appropriate. Now, financial professionals are legally obligated to put their clients’ interests first rather than simply finding suitable investments. The new rule could therefore eliminate many commission structures that govern the industry.

Advisors who wish to continue working on commission will need to provide clients with a disclosure agreement, called a best interest contract exemption, in circumstances where a conflict of interest could exist (such as, the advisor receiving a higher commission or special bonus for selling a certain product). This is to guarantee that the advisor is working unconditionally in the best interest of the client. All compensation that is paid to the fiduciary must be clearly spelled out as well.

Covered retirement plans include:

WHAT ISN’T COVERED

  • If a customer calls a financial advisor and requests a specific product or investment, that does not constitute financial advice.
  • Financial advisors can provide education to clients, such as general investment advice based on a person's age or income, and it also does not constitute financial advice.
  • Taxable transactional accounts or accounts funded with after-tax dollars are not considered retirement plans, even if the funds are personally earmarked for retirement savings.

HISTORY OF THE FIDUCIARY RULE
Originally, the Labor Department regulated the quality of financial advice surrounding retirement under ERISA. Enacted in 1974, ERISA had never been revised to reflect changes in retirement savings trends, particularly the shift from defined benefit plans to defined contribution plans, and the huge growth in IRAs.

A set of reforms was proposed back in 2010, but it was quickly withdrawn in 2011 after fierce protest from the financial industry regarding regulatory costs, liability costs and client concerns.

Five years later, the financial industry was put on notice in 2015 that the landscape was going to change. A major overhaul was proposed by President Obama on February 23, 2015. "Today, I'm calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests," Obama said. "It's a very simple principle: You want to give financial advice, you've got to put your client's interests first."

The Labor Department proposed its new regulations on April 14, 2016. This time around, the Office of Budget and Management approved the rule in record time, while President Obama endorsed and fast-tracked its implementation. The final rulings were issued on April 6, 2016. Before finalizing the ruling, the Labor Department held four days of public hearings. While the final version was being hammered out, the rule was known as the fiduciary standard. In January 2017 during the first session of Congress of the year, a bill was introduced by Rep. Joe Wilson (R-S.C.) to delay the actual start of the fiduciary rule for two years.

REACTION TO THE FIDUCIARY RULE
There’s little doubt that the 40-year-old ERISA rules were overdue for a change, and many industry groups have already jumped onboard with the new plan, including the CFP Board, the FPA, and NAPFA. Supporters applauded the new rule, saying it should increase and streamline transparency for investors, make conversations easier for advisors entertaining changes, and most of all, prevent abuses on the part of financial advisors, such as excessive commissions and investment churning for reasons of compensation. A 2015 report by the White House Council of Economic Advisers found that biased advice drained $17 billion a year from retirement accounts.

However, the department's regulation has met with staunch opposition from other professionals, including brokers and planners. Some advisors and brokers would rather be held to a suitability standard than a fiduciary standard because the latter will cost them money – in lost commissions and the added expense of compliance. The stricter fiduciary standards could cost the financial services industry an estimated $2.4 billion per year by eliminating conflicts of interest like front-end load commissions and mutual fund 12b-1 fees paid to wealth management and advisory firms.

While the best interest contract exemptions would permit broker-dealers and insurance companies to provide plan participants with fiduciary advice while still receiving commissions, many professionals fear the conflict-of-interest yardstick would essentially eliminate commissions. This in turn would force financial advisors to create or shift fees onto individuals, and could price many middle- and lower-market investors out of the market, the regulation's critics argue.

LEGAL BATTLES
Three lawsuits have been filed against the rule. The one that has drawn the most attention was filed in June 2016 by the U.S. Chamber of Commerce, SIFMA and the Financial Services Roundtable in the U.S. District Court for the Northern District of Texas. The basis of the suit is that the Obama administration did not have authorization to take the action it did in endorsing and fast-tracking the legislation. Some lawmakers also believe the Labor Department itself is reaching beyond its jurisdiction by targeting IRAs. Precedent dictates Congress alone has approval power regarding a consumer’s right to sue.

Some critics suggest the new fiduciary rule makes no difference anyway. Those observers say consumers will still be subject to being cheated by “bad actors.” For example, complying with the new rule will require more paperwork. Paperwork, critics say, is a great place to hide a scam and then later say the customer signed and knew what he or she was signing.

The Labor Department continues to defend the rule in multiple lawsuits in 2017.
After the department officially announced the 60-day delay to the rule's applicability, a "Retirement Ripoff Counter" was unveiled by Sen. Elizabeth Warren (D-Mass.) and AFL-CIO President Richard Trumka. Partnering with Americans for Financial Reform and the Consumer Federation of America, their counter attempts to highlight the "...cost to Americans of saving for retirement without the fiduciary rule, starting from Feb. 03, 2017." The press release from Americans for Financial Reform states, "Every day that conflicted advice continues costs them [Americans] $46 million a day, $1.9 million per hour, and $532 a second.”

WHO DOES THE FIDUCIARY RULE AFFECT?
The regulation is expected to increase compliance costs, especially in the broker-dealer world. Fee-only advisors and RIAs are expected to see increases in their compliance costs as well.

The fiduciary rule could be tough on smaller, independent broker dealers and RIA firms. They may not have the financial resources to invest in the technology and the compliance expertise to meet all of the requirements. Thus, it won't be surprising to see some of these smaller firms merge with or be acquired by larger companies. The brokerage operations of MetLife and AIG have already been sold off in anticipation of these rules and the related costs.

Advisors and registered reps who dabble in terms of advising 401(k) plans may be forced out of that business by their broker-dealers due to the new compliance aspects. This could reduce the number of advisors who serve smaller plans. That's what happened in the U.K. after the country passed similar regulations in 2011; since then, the number of financial advisors there has dropped by about 22.5%.

Ameriprise CEO Jim Cracchiolo said, “The regulatory environment will likely lead to consolidation within the industry, which we already see. Independent advisors or independent broker-dealers may lack the resources or the scale to navigate the changes required, and seek a strong partner.”

Annuity vendors also will have to disclose their commissions to clients, which could significantly reduce sales of these products in many cases. These vehicles have been the source of major controversy among industry experts and regulators for decades, as they usually pay very high commissions to the agents selling them, and come with an array of charges and fees that can significantly reduce the returns that clients earn with them.

WHAT SORT OF INVESTMENTS WILL THE RULE IMPACT?
The main impact is anticipated to be connected with IRAs, since these vehicles are often handled at brokerages. In particular, rollovers from 401(k) plans to IRAs will certainly come under scrutiny. There have been many instances reported in the financial press (and likely tens of thousands more in reality) about advisors suggesting rollovers to IRAs, even though it may not have been in the client’s best interest ― either in terms of moving the client’s money out of a low-cost company retirement plan that offered solid investment choices or in terms of the types of high-cost investments recommended in the new IRA.

The Labor Department has also released answers to common questions they've received about the new rules in the form of FAQs, which address topics from investments to advisor compensation.

MORE RULES FROM THE SEC?
As if there wasn’t enough confusion among advisors and clients about the new plan, the SEC has projected proposing its own set of fiduciary rules in April 2017. It is likely any new SEC rules would extend beyond retirement accounts and govern the way in which RIAs and brokers treat clients in all dealings, mandating that the client’s interests must come first in all cases. Former SEC Chairwoman Mary Jo White has indicated that she supports non-governmental, third-party examinations of investment advisors. FINRA would be an example of such a third party.

A major concern of many advisors and brokers will likely be whether or not a new set of SEC rules will be consistent with the existing Labor Department fiduciary rules. In the event of conflicting rules, financial advisors may find it difficult to follow the proper course of action.

If advisors and their firms are now faced with a second set of regulations that is decidedly different than the Labor Department rules, the costs of compliance and the manpower needed also could drive some smaller broker-dealers out of the business.

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