Financial advisory firms have a lot to do between now and April 10, 2017, when the Department of Labor's fiduciary rule becomes "applicable," in the nomenclature of the agency. Full compliance is not required until Jan. 1, 2018, allowing firms a transition period to set up policies and processes that conform to the new rule, but the clock is ticking.
"It's really not January 2018 date you should be thinking about to have everything in place," said Nancy Reich, executive director, financial services at Ernst & Young, at an all-day seminar presented by the Securities Industry and Financial Markets Association on the DOL fiduciary rule. "You have to have quite a lot of things in place by the April date in order to be able to comply."
By April 10, 2017 firms and advisors servicing retirement accounts must:
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adhere to the impartial conduct standards – give prudent advice in line with a client's best interest, avoid misleading statements and receive no more than reasonable compensation
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notify retirement investors of their fiduciary status and any material conflicts of interest
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designate someone to address material conflicts of interest and monitor advisors' adherence to impartial conduct standards
"It's complicated; it's big, a rule that has a lot of moving pieces," said Allen Meyer, partner at the Oliver Wyman consulting firm and a former head of compliance for corporate and investment banking. "The temptation is to try to figure out the perfect strategy and figure out execution of that … You have no choice but to get going now."
With that in mind, here are some key points advisors and firms should consider according to speakers at the seminar, including DOL Deputy Assistant Secretary Timothy Hauser.
1. Recommendations
"A core concept to remember is the concept of recommendation," said Hauser. "If you're not getting a fee for a recommendation you are not a fiduciary. …Some say you can't have a conversation with a customer about a detail about an investment. That's not true. You can describe the attributes of an investment, important features, what happens with withdrawals, historical performance versus a benchmark and cost — basic information about a product… You're a fiduciary when you recommend that they [customers] make that investment."
But you're not a fiduciary under the DOL rule if you just distribute or write communications such as newsletters, articles, speeches and books about financial topics. "Suze Orman is not a fiduciary advisor," said Hauser.
2. Compliance
"Our approach is to get people into compliance," said Hauser. "Through January 2018, we are not going to be going out of our way looking for ways to sue people. We will be looking for ways to help you get in compliance. After that I don't know."
There are many processes and procedures advisory firms need to adopt in order to comply with the fiduciary rule, so one of the first things they should do is identify potential conflicts related to direct and indirect direct compensation and then add to that list as necessary, said Myer of Oliver Wyman.
Then firms need to take into account the processes and procedures already on hand that can help address those potential conflicts.
"Assess what already exists at your firm that can be leveraged or speaks to these requirements," said Reich. "Determine where the gaps are, what needs development. It doesn't necessarily require completely new processes and procedures."
She suggests that firms use "decision trees, traceability matrixes, heat maps and checklists" to make that assessment, then identify where enhancements are needed.
Broker-dealer firms should review the suitability engines they currently use, and consider whether they will work under the best interest standard, which is the cornerstone of the new rule, said David Kaleda, principal, Groom Law Group.
One major means to comply with the new fiduciary rule is the best interest contract exemption (called a BIC or BICE), which allows advisors to receive commission-based compensation for retirement accounts.
"You're either conflict free or you'll use an available exemption," said Joshua Uhl, senior manager at Deloitte Consulting LLP. "A BIC will be needed in many instances. You'll need policies and procedures. Start now."
But before relying on an BICE, advisors "have to acknowledge their fiduciary status," said Eric Serron, partner at Steptoe & Johnson LLP.
There are a few levels of the BICE requirement that can be used, including a streamlined one that can be used by advisors who are already fiduciaries and receive "level pay" such as compensation in the form of a percent of assets when recommending that a client roll over a 401(k) account into an IRA. They must, however, document why the rollover was in the client's best interest.
3. Documentation
Documentation is key for advisors operating under the DOL fiduciary rule.
