The nation’s largest trade association for the alternative and direct investment space, ADISA, has reacted to the announcement from the Department of Labor’s Employee Benefits Security Administration regarding the final rule on retirement advice. This rule comes more than six years after an industry legal challenge led to an appeals court decision that vacated the previous administration’s attempt to expand the fiduciary duty to more areas of retirement advice.
The final rule requires financial advisors and other retirement professionals to prioritize clients’ best interests when making recommendations for rollovers to individual retirement accounts and certain annuities. It treats as fiduciaries those individuals who make “professional investment recommendations to investors on a regular basis as part of their business” where the recommendation is made under circumstances “that would indicate… that the recommendation is based on review of the retirement investor’s particular needs or individual circumstances, reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances, and may be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.”
ADISA’s Legislative & Regulatory Committee Co-Chair commented on the adopted rule, noting that it has been amended from the proposed rule to address industry comments. However, it remains to be seen whether these changes will have a material impact on how the rule is applied to broker-dealers and ADISA members who recommend alternative investments to their clients. The rule’s focus on the context of the recommendation indicates that the Department of Labor heard concerns expressed by ADISA and others regarding the proposed definition of fiduciary, which would have captured transactions that did not bear the hallmarks of a fiduciary interaction.
Throughout the rulemaking process, ADISA expressed concerns that the DOL was not taking steps to ensure that the rule’s impact would be studied and understood before it was finalized. ADISA’s members primarily serve retail investors who have worked hard, saved along the way, and desired access to investment products that operate outside of the traded stock and bond markets. These investments have traditionally been available solely to wealthy individuals, but making them available to retirement and other savers, where appropriate to their circumstance, can be a powerful driver of returns.
A 2021 Hispanic Leadership Fund study demonstrated the potential negative effects of the rule, particularly on Black and Hispanic retirement savers. The study indicated that the rule could reduce their projected accumulated IRA savings by approximately 20 percent over 10 years and contribute to an approximately 20 percent increase in the wealth gap attributable to IRAs for these individuals.
ADISA’s Legislative & Regulatory Committee Co-Chair further stated that “In moving quickly to adopt an important and far-reaching rule, the DOL missed the opportunity to do the kind of vital, painstaking research needed to understand both the intended and perhaps unintended effects of the rule on small balance savers, older savers, new savers and savers from communities that have experienced and continue to experience wealth and retirement savings gaps.”
The rule is set to go into effect on , giving advisors and other industry professionals a limited timeframe of five months to prepare for implementation.
