How the DOL Fiduciary Rule Allows for Commission-Based Investment Advice | Capital Group

Capital Group Policy Spotlight

June 23, 2017

How the DOL Fiduciary Rule Allows for Commission-Based Investment Advice

As of June 9, investment advice pertaining to retirement accounts is subject to a fiduciary standard, according to Department of Labor (DOL) requirements. This means advisors will be legally required to give advice solely in their clients’ best interest — and to meet new requirements that mitigate potential conflicts of interest.

The new conflict of interest rule will impact many common transactions, including rollovers and advice to move from brokerage to advisory solutions. One of the greatest impacts will be on the traditional broker-dealer business model.

The fiduciary standard generally bars advisors from earning commission on the sale of retirement investment products. However, the DOL has written into the rule the Best Interest Contract (BIC) exemption to allow for continued commission-based client relationships under certain circumstances. This article describes that exemption and how it works.

Intention of the BIC Exemption

The BIC exemption serves as the primary avenue through which commission-based relationships can continue in the post-rule environment. Among others, the BIC exemption covers commissionable mutual funds shares, including A and C shares, as well as commissionable variable annuity contracts.

A Best Interest Contract Requirement

To take advantage of the BIC exemption, broker-dealer firms must agree that they and their advisors will:

  • Acknowledge fiduciary status
  • Meet fiduciary norms of loyalty and prudence
  • Avoid misleading or incomplete statements
  • Receive no more than reasonable compensation
  • Disclose conflicts of interest
  • Maintain and comply with policies, procedures and advisor compensation practices that minimize conflicts of interest

These requirements are enforceable by plan participants under ERISA and by IRA investors (who will need to agree to a contract with language along these lines) under state law. The contract cannot include provisions that:

  • Require the potential client to allow the institution or investment advisor to disclaim or limit liability
  • Require the potential client to allow legal conflicts to be resolved in legal venues less favorable to the client
  • Require the potential client to waive his/her legal right to bring a lawsuit against the financial institution or advisor

There is no contract requirement for ERISA plans and participants — but there is for IRAs and other non-ERISA plans. Additionally, the contract need only be signed once the first recommended investment transaction is executed.

The contract can require mandatory arbitration of claims but cannot require a client to waive his/her right to join a class action lawsuit.

Disclosure Requirements

To rely on the BIC exemption, financial institutions must meet substantial disclosure requirements. Either in a contract (for IRAs or other plans) or in a written statement (for ERISA plans), the financial institution must:

  •  State the best interest standard of care it will provide, inform investors of the services the institution and advisor will provide, and describe how investors will pay for services (direct or third party)
  • Describe material conflicts of interest, including any fees or charges the financial institution, its affiliates or the advisor expect to receive from third parties
  • Inform investors that they have the right to obtain copies of the institution’s policies and procedures
  • Provide specific disclosure of costs, fees and compensation on recommended transactions
  • Include a link to the financial institution’s website
  • Disclose whether it offers proprietary products, receives third-party payments or limits offerings with respect to recommended investments
  • State whether the advisor and financial institution will monitor investments and alert investors about recommended changes, and outline the frequency of monitoring and reasons for alerts
  • Provide contact information for a representative of the financial institution

The Best Interest Contract Exemption has a transition period during which fewer conditions apply until January 1, 2018, when the rule will be fully implemented.

Please note that this is a summary of the disclosure requirements and is intended for informational purposes only. Capital Group and American Funds encourage financial advisors to direct specific questions to their individual firms and visit the DOL website for complete details on these disclosures.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.