The goal of a new U.S. Department of Labor (DOL) regulation—to reduce conflicts of interest among those who sell securities for a commission—appears simple enough. But implementing the so-called Fiduciary Rule is proving to be a thorny endeavor, for brokers and investors alike.

A Higher Standard

A key part of the new Fiduciary Rule, which redefines which investment professionals constitute a “fiduciary,” went into effect in June. Now, anyone who provides advice to customers with a retirement plan—including brokers and insurance agents who make sales commissions—have to follow the same standard as registered investment advisors who are compensated through a flat fee. That is, they have to recommend products that are in the best interest of their client.

Previously, commission-based sellers fell under a lower standard, in which they were only legally bound to sell products that were “suitable” for the customer. That allowed them to sell funds that might charge, for example, a higher management fee to the customer but yield a fatter commission to the seller.

Advisors can continue to receive commissions on the financial products they sell. But eventually they’ll have to provide customers with a document called the Best Interest Contract Exemption (BICE) if, say, they received a larger fee for recommending a certain investment. And they’ll have to fully disclose how much commission they’re receiving.

Some of this is still in the air. On August 30, the Labor Department announced that it was filing a request for an 18-month delay in implementing some of the provisions. All the same, Fiduciary Rule based changes are already starting to happen.

Variable Commissions

Although these changes seem pretty straightforward, it turns out that they open up a Pandora’s box. The issues surrounding mutual funds, including those tucked into 401(k) and IRA accounts, are particularly complex.

For a long time, mutual fund sales fees have been all over the place. A brokerage house could sell you shares that come with an upfront sales fee, otherwise known as a “load.” Conversely, it could sell you shares that feature a back-end load that kicks in if you sell your shares before a certain date.

Or, it could offer you a “no-load” fund. But firms have typically made up for their lack of a sales fee with other annual charges, like higher 12b-1 marketing fees.

Here’s the problem: Bigger investment firms offer numerous mutual funds from many different fund companies. And the fee structure across their entire “product shelf” is anything but uniform.

One Broker-Dealer’s Response

In the case of Edward Jones, a brokerage house with 12,000 offices around the country, the solution was to more or less drop out of the market. In anticipation of the DOL rule, it announced last year that it would stop selling mutual funds and exchange-traded funds to clients who own a commission-based IRA.  Now those investors have a lot fewer options for their retirement account—namely stocks, bonds, CDs and variable annuities.

“Right now, because there is such pricing variability within and between mutual funds, it is difficult to align mutual funds with the requirements of the Best Interest Contract Exemption,” the company explained at the time. “We believe in the future the mutual fund industry will need to align around common pricing and common structures in order to meet the DOL fiduciary standard.”

Individual investors hoping to buy fund shares for their IRA have to convert to an advisory account, which charges a a fee based on the amount of assets under management rather than on sales commissions. That way, the company can avoid conflicts of interest regarding which products it sells.

The Exception?

Whether that drastic step ends up being the exception or the norm within the industry remains to be seen. Rather than exiting the retirement fund space entirely, some experts predict that brokers will instead pare down their product offerings to only those that pass regulatory muster.

A second phase of the rule, which contains all the compliance requirements (including BICE) that put real teeth into the regulation, won’t go into effect until January 1. That is what the DOL is trying to get pushed back another 18 months to July 1, 2019. Theoretically, firms have some time to figure out how they’re going to tweak broker compensation and adjust the investment products they offer.

Sales Fees on the Decline

To be sure, sales charges have been on the decline even prior to the DOL rule, as savers have put an increased focus on mutual fund fees.

Investors withdrew $500 billion from share classes with sales loads between 2010 and 2014, according to a Wall Street Journal article that used data from the Investment Company Institute.  Over that same period, they pumped an additional $1.34 trillion into no-load funds. It’s likely that the DOL rule will only accelerate that trend.

What does this all mean for long-term investors? You could soon find yourself being steered into accounts that charge on an “assets under management” basis by your broker.

And you’ll likely find fewer product offerings that come with a sales charge. But that doesn’t mean you don’t need to keep an eye out for expenses. Companies can continue to sell funds with a 12b-1 fee of up to 0.25 percent.  So it’s as important as ever to keep track of any annual expenses that your broker may be tacking on to your retirement accounts.

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