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What Investors Need to Know About the New 'Conflict of Interest' Rule


This week, the Department of Labor unveiled new rules governing financial advice. This primer will help you make sense of the regulations.

man protecting money, personal finance, fiduciary rule, conflict of interest

This week, the Department of Labor made public new rules for investment advice and sales to retirement plans and individual retirement accounts. The revamped regualtions are designed to strengthen protections for investors.

Industry officials, investment companies, advisors, and brokers are still reading and absorbing the rule, and trying to anticipate what, if any, changes the rule will necessitate in their dealings with investors. And there are still legal and administrative challenges to the rule that may significantly alter the rule’s provisions. But the simple fact is that many investors are unaware of the rule; thus, they are also unaware that the new regulations could significantly change the relationship between investors and their advisors.

What is changing?

In a nutshell, the DoL rule adds some protections for investors by requiring that registered investment advisors and other persons act solely in the best interests of their customers in making investment recommendations—avoiding conflicts of interests and operating with full transparency. For many, yes, this will be a good thing. But I’m reminded by the famous “nine most dangerous words” as coined by former President Ronald Reagan: “I’m from the government, and I’m here to help.”

Why the Change May Hurt More Than Help

The new rules include significant enhancements to disclosure requirements, which means investment advisors have to adjust their business models. Though some investment vehicles may be “grandfathered in” and thus not subject to the new rule, many transactions that used to be simple and straightforward will now come with a heap of disclosure documents investors will have to look through and sign. Forms have a way of scaring people off, for sure, and some of the disclosures are likely to confuse investors more than increase their understanding of certain investment vehicles. Potentially worse still, certain products, such as variable annuities, may become too costly for advisors to profitably sell, due to the reductions in fees many will likely see and the increases in disclosure requirements. This may mean advisors simply won’t work as closely with investors of modest means, as the profit margin in doing so will now be lower. While dentists are unlikely to face this challenge as much as lower-earners, it still could impact you.

One of the bigger changes will include how individual retirement account (IRA) rollovers are handled. One of the key elements of the DoL fiduciary rule will be how investment advisors determine whether it is in the client’s best interest to roll over assets from an employer-sponsored plan to an IRA—which includes billions of investor dollars each year. Sometimes the advantages of rolling over funds into an IRA are not that clear; investors often do this only to simplify their portfolios. This is but one category of a pretty sweeping change in which you may no longer be able to rely on your advisor for guidance.

What You Can Do Right Now

While your advisor won’t have a lot of answers just yet—the rule is too new—you should schedule time with him or her to make sure you understand the impact of the changes, either on the costs or the level of service your advisor provides.

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