Leaders of the Financial Services Institute warmly welcomed about 300 attendees to the final panel of its Financial Advisor Summit 2015 on Tuesday in Washington. But they left advisors and other guests with a sober reminder of what lies ahead with a final version of the Department of Labor's new fiduciary rule expected in the first quarter of 2016.
"It's time to get under the hood of your books of business. Look at how your accounts would be catalogued by the DOL to understand the approach [regulators] are taking and exploring, and ask what your books of business will look like in a post-DOL world," said David Bellaire, the FSI's general counsel.
Bellaire and his colleagues highlighted the major changes likely to impact financial advisors and broker-dealers as the Obama administration moves ahead to issue new fiduciary rules before the president leaves office. Broker-dealers and advisors would have eight months to implement them.
"The new Employee Retirement Income Security Act rules are very different from the Investment Adviser Act [of 1940] that you operate with daily," Bellaire explained. Under ERISA, advisors would be prohibited from engaging in transactions that entail conflicts of interest for the client unless there is an exemption; whereas under the '40 Act, advisors and clients reach an agreement regarding potential conflicts.
Overall, "DOL represents a fundamental rethinking on the way retirement advice is delivered," he stated. "It means huge and sweeping change for the industry and enormous challenges for us all."
The "sweeping changes" result from expanded definition of fiduciary, which would cover the majority of interaction with retirement investors under the new rules. Advisors and clients would be required to sign Best Interest Contract Exemption contracts, in which broker-dealers and advisors acknowledge the new fiduciary standards and their impartial conduct codes.
The contracts have extensive warranties that entail "extensive changes to compensation models," since only "reasonable compensation" is allowed, according to Bellaire.
But there's more
Information on exactly what and who gets paid via product sales has to be published in detail on publicly available websites in a readable format, the FSI expert adds. And there must also be point-of-sale disclosures with one-, five- and 10-year cost projections for each product sold; annual reports on the products are also required.
"There is a limit on what assets can be in BICE accounts," he explained, and alternative products like nontraded REITs are not permitted.
Advisors and broker-dealers have to show quarterly returns for each and every retirement account and money movement, says Bellaire. "This is information that is not usually kept for IRAs and other accounts by broker-dealers. The requirements are very complex and entail significant changes in how broker-dealers do business."
The contracts are likely to raise costs significantly for the broker-dealers and expose them to further liability, he states. "DOL will put pressure on broker-dealer and advisor compensation models … and the result is reduced access to retirement advice products and services for small and midsize investors," Bellaire said.
It's also possible that commissions across product types – variable annuities, mutual funds and ETFs – could be the same, he notes.
Capitol Hill
Meanwhile a group of 46 Democrats has requested a second comment period on the new rules.
"This is very significant, because the DOL has been resistant to opening things up for another comment period," said Robert Lewis, head of legislative affairs for FSI. "For the industry, it would be good to have the opportunity to talk before the proposal is finalized."
