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New Department of Labor Fiduciary Rule

I’d like to thank Greg Johnston, CFA®, CFP®, CPWA®, QPFC, AIF®  for today’s guest blog post on the Department of Labor’s new fiduciary rules. Greg has over 25 year’s experience in the financial planning and investment worlds and he works out of Peoria, Illinois. I highly recommend if you are in that area to reach out to Greg for further financial tips and help.


You may have heard of a new rule issued by the Department of Labor with respect to retirement accounts. It is a long and complex regulation. But the over-riding purpose of the rule is shaking the financial industry to its core.

In short, financial advisors working with retirement accounts (not taxable brokerage accounts), will now be held to a higher standard known as the fiduciary standard. “Fiduciary” is a legal term, based in case law, that essentially means operating in a clients’ best interest.

Wait a second. You mean my financial advisor has not been operating in my best interest? For most people, the answer is probably no.


There are two sets of regulations that govern financial advisors. The problem is that these regulations do not apply the same standard of care to clients. The vast majority of financial advisors are regulated by what is known as a “suitability standard”. Alternatively, registered investment advisors, follow a higher standard of care known as the fiduciary standard.

While they may sound similar, from a legal perspective, they are quite different. Someone following the suitability standard could successfully argue that a high-fee variable annuity is suitable for an investor. A professional following the fiduciary standard cannot make that argument if a similar, lower-cost alternative exists.

In 2009, the Treasury Department issued a report proposing that the SEC establish a fiduciary duty for brokers, no matter the account type, and harmonize the standard of care with the regulation for advisors (i.e. move to a fiduciary standard of care). Unfortunately, since that time, the SEC has failed to act.

Enter the Department of Labor (DOL).

The DOL is the agency that is responsible for implementing / regulating the provisions of the Employee Retirement Income Security Act of 1974 (known as ERISA). Think your 401(k) and individual retirement account(s).

One of the DOL’s concerns is some of the products and the underlying costs that certain investment advisors recommend for use in retirement accounts. In short, the recommendation may be suitable, but may not be in the client’s (or underlying participants) best interest.

After six years of effort, the DOL issued a final rule that has broadened the definition of fiduciary advice to ERISA plans and has extended it to include advice on individual retirement accounts (such as IRA’s but not taxable accounts). The debate over the rulemaking has been contentious and the subject of intense scrutiny.

What Does the Rule Do?

The final rule, has a phased implementation starting April 10, 2017, and broadens the definition of fiduciary for firms and financial advisors providing investment advice to ERISA plans and IRAs. In addition, the rule extends fiduciary coverage to rollover advice and distributions.

The rule will apply to a variety of retirement savings accounts including IRAs, simple IRAs, SEP IRAs, and health savings accounts (HSA). Traditional taxable brokerage accounts will not be covered.

Providing education is not enough to trigger coverage by the rule. Any advice or recommendation must be provided in exchange for a fee or other compensation.

In a recent client bulletin, one of the nation’s leading experts on ERISA and retirement plans, Fred Reish, said “The definition of fiduciary advice continues to be very broad, capturing almost all common sales practices for investments and insurance products. It includes investment recommendations to plans, participants and IRA owners, as well as recommendations about distributions from plans and transfers and withdrawals of IRAs. All of those will be fiduciary activities.”

Why Is It Important To Me?

The most prominent part of the new rule is the fiduciary standard. The standard simply requires financial professionals to put the interest of clients ahead of their own.

While the rule’s effect will not be immediate, over time, it is likely that the underlying investment costs paid by participants in retirement plans and IRA’s will decline. Lower costs should improve participant investment returns and increase their portfolio values.

Under the prior suitability standard, if there was a dispute, the client / participant had the burden of proving harm. Under a fiduciary standard, the burden shifts to the financial advisor.


The financial services industry (at least those who follow the suitability standard) is not pleased with the new rule. They realize the higher-cost (and revenue-generating) products they have been recommending may not meet the new standard.

The opposition claims that small investors will no longer be able to get advice because it will be too costly to provide it to them. In addition, the industry claims that the DOL has over-stepped its regulatory bounds and it is not the right agency to regulate investment advice. They believe ERISA was not designed to regulate broker-dealers and investment advisors.

While the DOL has issued the final rule, there are still ways to stop its implementation. A court challenge is a real possibility.

In addition, with many congressmen vocally opposed to this rule, a resolution has moved through the house to kill the new rule out right. Senate action is pending. The President says he would veto any such measure, but his tenure is rapidly winding down and it is unclear what the next President will do.

Lastly, the next president may choose to alter or rescind the rules.


I believe that anyone providing investment advice and/or recommendations adhere to a fiduciary standard. Period. It is simply what clients expect.

Alas, that is not the world we live in. There are bad actors in all professions. No rule, issued by a government agency is going to change that. Clients have the ultimate responsibility to stay on top of their finances, do a background check on their advisor, and to monitor their portfolio. Do not be afraid to ask your advisor questions.

On our website, there are links to a variety of information and articles that you should ask when seeking a potential financial advisor.

About the Author

Gregory A. Johnston, CFA®, CFP®, CPWA®, QPFC, AIF® has over 25 years of investment and comprehensive financial planning experience. He started Johnston Investment Counsel in 1997 as an independent, fee-only investment management and comprehensive planning firm located in Peoria, Illinois. His clients include individuals, retirement plans, and endowments / foundations.

Michael Garry Yardley Wealth Management

Author Michael Garry Yardley Wealth Management

Michael Garry is a CERTIFIED FINANCIAL PLANNER™ practitioner and a NAPFA-registered Financial Advisor. He is a member of the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA).

More posts by Michael Garry Yardley Wealth Management