The Department of Labor (DOL) fiduciary rule transition period is well underway—meaning that advisors are now bound by the rule's impartial conduct standards. While some elements of that equation are relatively straightforward, defining the concept of "reasonable" compensation can be tricky.
For this reason, advisors may be tempted to delay efforts to comply with this standard, especially since many believe that the rule will be relaxed or even repealed under the new administration. This can prove to be a mistake, however, as those advisors who do make an effort to comply with the reasonable compensation standard during the transition period are likely to be viewed as adding value for clients—potentially generating increased sales from clients who are already familiar with the rule's requirements.
The Reasonable Compensation Standard
During the fiduciary rule's "transition period" (which began June 9, 2017, and ends on the full effective date of January 1, 2018), advisors are bound by the rule's impartial conduct standards, which require that advisors act in the client's best interests, make no misleading statements and receive only reasonable compensation. Unfortunately, the concept of "reasonable compensation" is not defined in the rule itself, often leading to confusion over what types of compensation an advisor may accept and remain compliant.
The DOL has indicated that what is reasonable for compensation purposes will depend upon market data and industry norms—meaning that advisors who receive only reasonable compensation are not expected to receive below average compensation. Industry trends should be used to determine the level of compensation that is reasonable for any given product or investment, so that advisors should aim to charge compensation that is in line with others in the industry who offer similar products and services.
To facilitate reasonable compensation practices, firms can include in their policies and procedures methods for determining whether their compensation structures are in line with others in the industry. For some firms, this may involve (at least initially) using a benchmarking service to determine market compensation trends.
Advisors should also note that what is reasonable in terms of compensation will vary based on the complexity of the investment and the services provided (i.e., if the advisor provides ongoing services with respect to an investment, his or her compensation would reasonably be higher than if the advisor simply facilitated the initial investment).
Importantly, the reasonableness of compensation is likely to evolve over time, so that advisors should review their compensation practice at regular intervals in order to ensure that compensation remains reasonable. Because the fiduciary rule requires that advisors clearly disclose all compensation to clients, the rule promises to eventually create a more transparent marketplace where determining reasonable compensation is a much simpler process.
