Insights from the experts in investment fiduciary responsibility.

DOL’s “Conflicts of Interest Rule”: Two Views from the Trenches

Posted by Richard J. Lynch, AIFA®, President, fi360, Inc. on October 16, 2015

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Much has been written about the Department of Labor’s Conflicts of Interest Rule (Rule) ever since it was originally proposed in October 2010.  After an initial attempt and several years of reworking DOL reintroduced the Rule earlier this year.  There have been two comment periods and four days of hearings to solicit feedback from the public.  The hearings were held August 10th through the 13th and the second comment period ended on September 24th.  In total 3,131 comment letters and 28 petitions have been submitted, which is a very large number by any measure.  The overwhelming and often passionate feedback reflects the extensive interest in the outcome of this Rule by those on both sides of the debate.

I was at a conference last week presenting an update on the proposed Rule.  I mentioned that most now believe the Rule is going to pass and the debate now centers on what parts of the Rule will be changed before that happens.  We believe the Final Rule will be finalized early next year and expect:

  • Core framework of Rule largely intact
  • 3-part fiduciary definition as proposed
  • All carve-outs retained; education carve-out loosened
  • BIC Exemption will be modified to make it more practical
  • Clarify contract timing
  • Keep VAs
  • Add small DC plans
  • Eliminate performance disclosure
  • Simplify 3-way contract to 2-way between firm/client
  • Exclude level-fee advice
  • Transition Period
  • Currently 8 months after Rule finalized; may add additional phase-in dates

Two advisors in the audience approached after my presentation and their comments/questions reflected a clear demarcation between those who favor and those who do not favor the Rule.  The first advisor had some choice words for our over-reaching government as he echoed what we have generally heard from broker-dealers & insurance companies; the added compliance burden is too complicated and will be far too expensive to implement, ultimately driving higher fees and limiting investor access to advice.  His business model required navigating the inherent conflict of providing investment advice and selling insurance products.  I agreed with his premise that the Rule certainly complicates your life if you’re working within a conflicted business model.

The second advisor didn’t see the Rule as that big of a deal and stated that “we’re all going to be fiduciaries eventually, so we might as well begin acting as such.”  He admitted that his non-conflicted business model certainly simplified the changes he would most probably have to make once the Rule was finalized.

A surprise during this discussion came from the conflicted advisor, who stated that if the Rule passed he would give up his advisory business and focus solely on insurance.  I had suggested that he consider eliminating the conflict, something we always advocate in class, but that is often easier said than done.  The surprise was not that he agreed and intended to eliminate the conflict, but that he would focus solely on selling insurance products rather than providing investment advice.  His current book of business must be weighted towards insurance as that would explain his reluctance to walk away from the associated revenue.

DOL’s primary purpose for this Rule is to ensure client’s best interest come first.  Fewer conflicts of interest will help make that happen and the BIC Exemption will make it more difficult to operate within a conflicted business model.  So we should expect to see more adopting this conflicted advisor’s intended approach of eliminating the conflicts.

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