How the Fiduciary Rule Affects Ordinary Clients

The DOL Fiduciary Rule is at least partially now in effect, and, until now, the overarching question has focused how the new rule will impact financial advisors.

But hold the phone – shouldn’t the real question be how the new rule impacts the ordinary investor?

The answer to that question is a resounding “yes,” especially for financial advisors fielding queries from clients concerned about the rule’s impact. Those advisors can expect to hear about issues near to the client’s heart, such as fees and investment management.

To prepare for those questions, advisors should conduct a thorough and transparent “DOL client impact assessment.”

Focus on these key areas:

Changing fees – “Investors can expect to see a reduction in mutual fund fees, and more so over time,” said Charles Field, co-chair of Sanford Heisler Sharp's Financial Services Litigation practice. Up until now, brokers were required by law to charge investors the sales commission that a mutual fund disclosed in its prospectus, Field explained. And some of the fees were quite high (5 percent or more) and deviations were not permitted. “Additionally, many continued to pay trailing fees to brokers after the sales were made. Accordingly, brokers offering these mutual fund shares would run the risk of violating the Fiduciary Duty Rule,” File noted.

Get ready for “clean shares” - A question and answer piece issued by the DOL presents the concept known as “clean shares” - a likely future best practice in the sale of mutual funds, Field said. “Clean shares” are basically no-load mutual funds shares that will allow the broker to charge a commission it deems in compliance with the Fiduciary Duty Rule,” he explained. “However, the DOL acknowledges it will take time for brokers to develop business models that use ‘clean shares’ and other innovative market products.” When clean shares do go mainstream, expect the commissions charged post-Fiduciary Duty Rule will be significantly lower than the commissions charged under the current structure, Field added.

Higher operational client costs, due to compliance process – Broker-dealers who have to bear the costs of compliance, especially in key areas like operational support, process changes, audits and reviews, will likely pass those costs on directly to the clients, noted Robert Kirk, director of wealth management at Mphasis, in Dallas. “Errors and omissions (E&O) costs would rise as many firms would need to ensure that the ERISA standards were upheld and that the cost of a mistake would have a larger impact than it does today,” Kirk said. He also noted some retirement accounts would change and approximately 55 percent of advisors will drop indexed and variable annuities.

Fewer advisors for clients in a post DOL Rule environment – Client should start viewing their advisors in the same way they view their doctors, at least from a paperwork perspective, said Joe Templin, managing director at The Unique Minds Consulting Group in Ballston Spa, N.Y. “Doctors have had to add multiple support people just to fill out paperwork from HIPPAA and the Affordable Care Act,” Templin said. “Now imagine the exact same burden placed upon all financial advisors.” Templin said advisors will need to raise fees to cover the required overhead costs, which will push many small clients out the door. They were the people the DOL action was designed to protect,” he said. “By and large, advisors will have to work even harder to make less, and there will be a decline in new representatives entering the profession.”

More transparency for clients - While it’s easy to get bogged down in industry jargon, simply put, the fiduciary standard means that all advisers will be required to put clients’ interests first, said Tom Terhaar, an investment advisor at Conrad Siegel Investment Advisors in Harrisburg. “Unfortunately, consumers have historically been at a disadvantage when it comes to investing, especially for retirement,” Terhaar said. “Many are uninformed and rely on the guidance of advisers who may stand to benefit from making unsuitable recommendations. Plus, there have been conflicts of interest, with advisers recommending financial products that benefited them rather than the investor.” That should all change to the client’s advantage, he stated. “Now, the rule has brought new light to the term ‘fiduciary’ and the implications around its application,” Terhaar said. “While the full scope of the final version of the fiduciary rule has been delayed, partial implementation of the new regulations should make the buying experience more informed, transparent and positive for consumers.”

Clients most affected – The investment clients who will be most affected by the DOL Fiduciary Rule are those clients who do business with firms who’ve been charging commissions, said Laura Redfern, a financial planner at Shadowridge Asset Management in Austin. “These companies have already made changes over the past year which have alerted customers to the fact that something is going on,” Redfern said. “Smart clients are the ones asking questions and getting answers.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The, and Bloomberg. Brian may be contacted at