Defining Fiduciary

DOL Suitability Standard Spurs Conflict

New compliance standards creating broad-reaching dissonance

by Allana Ritchie

Ms. Ritchieis a content writer for, where her primary focus is personal wealth management. 

Financial advisors trying to follow new rules from the Department of Labor may encounter mixed messages from regulatory agencies and find it a tall order to meet future compliance demands.

The Labor Department (DOL) hopes to solve a $17 million fraud problem with revamped regulations that hold financial advisors accountable if they give misleading retirement advice.

The proposed universal fiduciary standard would protect consumers, and the DOL fears that without amending the standard, the security of retirees will continue to be jeopardized. The legislation sparked controversy among both regulatory agencies and financial professionals.

Stakeholders include the U.S. Securities and Exchange Commission, the Financial Regulatory Authority, investors, retirees, brokers and financial advisors – all of whom have varying degrees of acceptance. As a whole, regulatory agencies carry broad responsibilities, governing securities and retirement plans as well as enforcing ethical guidelines for providing financial advice.

The extension of its reach is perhaps too broad. Supervision of annuities is one area where DOL and SEC roles overlap. A brief examination of each agency's authority, from one annuity type to the next, shows how the pending legislation may fall short.

Department of Labor Proposal

How did we get here? Americans lose an estimated $17 billion annually on bad investments, according to a recent report from the Council of Economic Advisors.

In this case, bad investments doesn’t mean one that turned sour unexpectedly but one that was either known to be poor at the start and still recommended or one in which a financial advisor was financially incented to promote to an investor.

The current SEC standard for recommending securities specifies that "your broker must have a reasonable basis for believing that the recommendation is suitable for you." The guidelines include an obligation for brokers to evaluate the context of a buyer's financial situation.

Raising the bar of accountability could prevent financial professionals from advising consumers to purchase unsuitable products. So in April, the DOL initiated an evaluation period for this legislation, which it wrote Department leaders believe the proposed changes demonstrate the Obama administration's commitment to assisting the middle class by adding a layer of financial protection.

More than a semantic distinction, the precise language in the proposal emphasizes the legal obligation of advisors and fortifies a standard of fairness. To meet the standard, the person recommending a product must believe the investment is beneficial to the consumer within the context of the purchaser's financial situation.

The DOL's standard removes the seller bias based on commissions and personal gain. Under the new rules, brokers and advisors would submit to a fiduciary standard – what is being called a "best interest" standard. This means they would be bound legally to putting their client's interest above their own.

The tightened rein could prevent the peddling of complex products (intended to deceive buyers) and contracts stacked with extraneous fees. For example, brokers and advisors recommending retirement products would be required to give advice based on client needs, rather than commissions. This could apply to products such as 401(k)s, IRAs and annuities.

Annuities and Regulatory Agencies

Annuity investments, for instance, show the complexity and potential conflicts of overlapping standards.

The DOL oversees annuities purchased through qualified retirement plans. But the SEC and FINRA (supervised by the SEC) establish rules for the marketing and issuing of annuities. The SEC also regulates a subset of available annuities. It moderates annuity use by requiring disclosures be provided to investors and reviewed by the SEC before the product is issued.

The SEC handles all variable annuities, those where purchasers decide which investments premiums go to. Broker-dealers selling variable annuities must be FINRA members. FINRA already has an annuity suitability guideline, Rule 2330, but it applies only to deferred variable annuities.

The majority of indexed annuities, which are based on an external index like the S&P 500, are not registered as securities and therefore are not subject to SEC regulations. The SEC doesn’t regulate any fixed annuities, where the earnings are a set amount and guaranteed by the issuer. This type of financial product on its own shows how multiple agencies have varying rules, changing from one annuity to the next, and evolving to meet legislative prerogatives from one administration to the next.

In this case, bad investments doesn’t mean one that turned sour unexpectedly but one that was either known to be poor at the start and still recommended or one in which a financial advisor was financially incented to promote

Heightened regulations could make retirement annuities less accessible for investors and more difficult for advisors to sell.

Impact on SEC, FINRA and DOL

Regulatory agencies use suitability standards for modulating financial investments. While sharing similar goals, the standards for each agency can look different in theory and practice.

With the DOL, SEC and FINRA's different levels of standards, fairly enforcing a consistent message across the financial industry may prove difficult. The Financial Industry Regulatory Authority (FINRA) and its overseer, the Securities and Exchange Commission (SEC), protect retirement and investment accounts.

For example, FINRA Rule 2111 requires brokers, financial advisors and consultants to meet a suitability standard for any recommendation of securities. Richard Ketchum, CEO of FINRA, discussed the proposed standard at a Securities Industry and Financial Markets Association (SIFMA) conference in March, according to

Ketchum told SIFMA Vice President Ira Hammerman it would be far preferable to have a single, consistent [fiduciary] standard that operates out of the SEC across all [investment] vehicles that exist for the individual investor. “I’m confident that each of the commissioners recognizes the importance of the SEC playing a central role in defining a best interest of the customer standard for the industry,” Ketchum said.

The DOL also seeks to protect the welfare of retirees. Based on the Employee Retirement Investment Security Act of 1974 (ERISA), the DOL oversees standards for qualified retirement savings plans. While the proposal has the potential to harmonize suitability standards, opponents fear it may introduce conflicting messages, stunting the ability of agencies to conduct financial regulations.

DOL Assistant Secretary for the Employee Benefits Security Administration Phyllis Borzi responded to criticism regarding the potential for overlapping standards in a July 2011 hearing. Borzi said, "[the DOL and SEC] are actively consulting with each other and coordinating our efforts."

Resistance from Industry Professionals

Insurance agents, retirement advisors and brokers all will be responsible for adhering to the new standard. Many of them are skeptical about the execution of it, should it pass.

In fact, when the DOL first broached the subject of new fiduciary rules in 2013, financial professionals pushed back. SIFMA surveyed 18 member firms, estimating that new compliance costs, for systems and training, could cost brokers $8 million.

They say any new regulations intended to protect consumers likely will result in a trickle down in compliance costs for industry professionals. In a comment letter to the SEC, investment giant Charles Schwab predicted that creating a unified standard would cost the registered investment advisor industry $1 billion.

Putting an exact price-tag on the proposal's repercussions is difficult. Whatever the cost, legislators face a weighty task in balancing demands across the financial industry. The fiduciary proposal remains under consideration from April 20 to July 6. While industry trade groups requested to lengthen this period, the DOL denied the extension.



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