Insights from the experts in investment fiduciary responsibility.

DOL Webinar: Your Fiduciary Rule Questions Answered – Part 4

Posted by Duane Thompson, AIFA®, Senior Policy Analyst, fi360, Inc. on December 01, 2015

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fi360 hosted a webinar recently on prospective changes to the Department of Labor’s final fiduciary rule.  Since we were unable to respond to all of the questions during the session, we are posting responses here in the 4th of a series of blogs.  The DOL is expected to issue a final rule during the first half of 2016.

Keep in mind that the information provided below is for educational purposes, not as legal or compliance advice, and that the final rule will change.  So with these caveats, here are our responses. 

1. It sounds like advisors to small plans (under 100 participants) would sign a BICE contract, but they still can get indirect compensation like 12-b1 fees.  Wouldn't this be in conflict with putting the participant interests first?  Seems contradictory.

Under the BIC Exemption, the Department has attempted to strike a balance by permitting incentive compensation for advisory services, but also requires that firm and broker compensation be reasonable and further, that they act in the best interest of the plan or account holder. 

So, yes, in broad terms any compensation is a conflict – whether it is a level fee, commission, or revenue-sharing income received from a third party.  To be in compliance with ERISA’s fiduciary standard requires all of these different forms of compensation to be: 1) reasonable; and 2) a necessary service.  Under BICE more specific conditions are attached to manage the conflict.  It will be interesting to see if DOL enforcement actions or court decisions handed down in connection with excessive fees are based on a comparison with level fee, incentive-based arrangements, or something else.

2. How do we get ahead of this--regardless of outcome?   What can a registered rep /IAR do to adapt his entire business and business model to follow and promote business as a "fiduciary" practice?

Promoting a fiduciary model is tough if the agent’s firm resists change.  In a way the DOL rule’s exemptions offer firms the option of blending sales and fiduciary advice under one roof, but only if the fiduciary standard dominates the client relationship.  This is an open question that firms have been struggling with for years under securities law. 

Over time the industry has moved towards a fiduciary model.  Ten years ago FINRA and many large firms argued that broker-dealer sales rules were more effective in protecting clients than a fiduciary standard.  Today they have backed away from that position but still lobby against a ‘robust’ fiduciary standard.  It will probably take many more years for the industry and regulators to sort things out.  In the meantime, dual registrants will have to judge for themselves whether they can develop a fiduciary practice in their current environment.

3. Am I over simplifying [the issue]?  If I only receive level comp from plan sponsors or IRAs and sell no proprietary products, I would not be subject to a BIC requirement?

For the most part, no, you would not be subject to BIC.  If you receive level compensation as an advisor to a plan, there is no prohibited transaction associated with your compensation; hence, there is no need for a prohibited transaction exemption. The same is true if you are paid a level fee for advice you render on an IRA account. 

The that needs to be addressed by the DOL is whether a level-fee advisor to a plan would be subject to the BIC Exemption when providing rollover advice to a participant in that plan.  Typically, economies of scale allow an advisor to charge less on assets held in a plan than what they would charge when the assets are rolled-over to an IRA.

Therefore, the advisor would have a financial incentive to recommend a rollover. This would normally be considered to be a prohibited transaction under existing regulations. Under the proposed new rule, the advisor could presumably use the BIC exemption to allow the rollover recommendation. It is possible that the DOL could revise the proposed rule to simplify the ability for level-fee advisors to recommend rollovers without having to rely on the BIC Exemption. 

4. Please discuss how an advisor serving retirement clients, who is also a part of a wealth management firm, should approach the rollover issue.   Is it likely the DOL sees those two services as distinct from one another, and therefore the fees can be different?

You may recall that in its 2010 fiduciary rule proposal, later withdrawn, the DOL did not include rollover advice in its coverage.  However, the Department asked whether rollover advice should be covered. While the DOL has traditionally treated rollover advice and investment advice to retirement accounts as separate activities – rollovers as a non-fiduciary activity and discretionary management as fiduciary -- this regulatory gap will disappear under the new, proposed fiduciary definition.  The one current exception involves a DOL agency interpretation holding that when a firm is already an ERISA plan fiduciary, it would be deemed a fiduciary when providing rollover advice.

Under the proposal, if a firm meets the expanded definition of an ERISA fiduciary, both activities will be subject to the DOL’s prohibited transaction rules (including advice on IRA accounts).  As such, the fees for either of these activities must be reasonable and the services ‘necessary.’  Taxable accounts managed or advised by a firm are not subject to ERISA or DOL jurisdiction.

5. Great presentation. How would you respond to those who say this rule will reduce access to services to the middle income savers?

No independent academic literature has corroborated industry claims that the middle market will be abandoned as a result of the DOL rule, although no one disputes that the costs for firms in terms of new compliance requirements and potential legal liability will be higher.  Industry and DOL estimates of these costs vary significantly, but there is no evidence that the rule will cause severe dislocations in the retirement marketplace along with access to advice.   To the contrary, suggests otherwise.

Proponents of the rule counter that fiduciary advisors charging level fees are already serving middle income savers and  that they, along with robo-advisors, can help plug gaps in services.  The UK’s regulator has told the DOL that similar concerns arose when it banned commissions, but that the reduction in number of advisor registrations involved other factors, including an economic downturn.  However, a RAND study sponsored by the DOL offered two interesting observations on the UK commission ban: 1) inflows to higher-cost funds tapered off; and 2) the cost of financial advice “may have increased modestly,” by up to 25 basis points.


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