The final fiduciary rule announced by the Department of Labor on Wednesday does not go as far as many critics of the proposed rule had feared, but it will have an impact on financial advisors and the products they offer to clients. It's also expected to accelerate the move from a commission-based business to fee-only model, which has been an ongoing and growing development in the evolution of the industry.
Advisors, however, will still be able to offer commission products, including annuities and proprietary services, but not necessarily in the way they have until now. Moreover, the changes won't take effect in their entirely until Jan. 1, 2018, months later than had been expected.
"Advisors need to think about the product set they currently offer clients," says Matt Sommer, director of defined contribution and Wealth Advisor Services at Janus Capital. They need to consider the fees for those products, but there is flexibility. For example, says Sommer, the rule says that "fees are not the only criteria to use when making investments … and that moving from a commission-based client to fee-based one is prohibited if it's not in the client's best interest….It's all about the client."
"Whatever the investment vehicle involved (such as stocks, annuities, mutual funds, SMAs or commission products), the advisor must be acting as a fiduciary," says Jim Pasztor, of the advisory firm Pasztor & Associates and vice president of academic affairs at the College for Financial Planning.
The rule is "focused much more on disclosure than outright elimination of differential compensation," says Natalie Wolfsen, chief commercialization officer of AssetMark, a turnkey asset management program provider for 7,000 advisors.
Here's how the rule is expected to affect some of products that advisors offer for retirement accounts, which are the only client accounts that are covered by the DOL's fiduciary standard.
Rollover IRAs
While the rule does require that advisors working with clients on rolling over their 401(k) accounts into an IRA act in the best interest of those clients it does not regard the information or education they provide about retirement products as investment advice, as had been feared. "Advisers and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties," according to the DOL Fact Sheet.
Advisors will also be able to continue to sell commissioned products if a Best Interest Contract Exemption (BICE) is signed by the client and the advisor's firm. The form, which can be signed at the point of sale not earlier, commits the advisor to put their client's best interest first so long as they
- disclose conflicts of interest
- charge "only reasonable compensation"
- avoid misleading statements about fees and conflicts of interest
- prohibit financial incentives for advisors that act contrary to a client's best interest
What is "reasonable compensation," however is open to interpretation.
Advisors will need to be much more aware of the fee structure of the rollover IRA compared to that of the 401(k) plan, says Terry Dunne, managing director of rollover solutions group for the Millennium Trust Co. Fees in 401(k) plans are often lower than fees in rollover IRAs.
Fee-only advisors, whether they charge a fee based on a percentage of AUM or a flat fee, will not be required to file a BICE for recommending that a client roll over assets from an employer plan to an IRA. That's because they receive the same compensation no matter what investments are included in the rollover IRA, according to the DOL.
