The DOL's fiduciary rule may be the biggest regulatory change in the financial services business since the mid-1970s when brokers' commissions were deregulated and IRAs were created. On April 10, the first of two effective dates for phasing in the rule, all broker-dealers, registered reps and insurance company agents earning commission-based compensation for work with retirement plans or IRAs will be deemed fiduciaries, which will require them to act in the best interest of their clients. Even RIAs, who are already fiduciaries, will be affected by the rule change.
The rule is long – running over 1,000 pages – and complicated, but "doable" for financial advisors, says Marcia Wagner, managing director of the Wagner Law Group, a Boston law firm specializing in employee benefits and pension law. "There's been a lot of panic about the rule," she says, "but when you break it down into its parts it's doable. If you look at the whole thing, it's overwhelming."
Wagner, who's also co-author of the book "The Advisor's Guide to the DOL Fiduciary Rule," led a ThinkAdvisor-sponsored webinar this week, "The New Fiduciary Rules: What Do You Need to Know and Do Now," which focused not just on the basics of the rule but also on many details, some of which may surprise you. Here are some of the highlights of that webinar.
Defining a Fiduciary
The DOL rule expands the definition of a fiduciary. A fiduciary will no longer be defined as someone who makes investment recommendations on a regular basis, with the mutual understanding of the parties involved, that serve as the basis for an investment decision and are individualized to the particular plan's needs – all included in the definition of a fiduciary under current law.
Under the new DOL rule, providing advice one-time only, rather than regularly, would make an advisor a fiduciary, and there is no need for a mutual understanding of the parties involved. Also, the advice doesn't have to be the primary basis for an investment decision or individualized. The client "merely needs to receive the advice, not act on it," says Wagner. "Merely recommending a rollover will be considered fiduciary advice even if it there's no recommendation about how to invest it."
In addition, according to Wagner, if an advisor says that he or she is a fiduciary – even they wouldn't qualify otherwise – the advisor is deemed a fiduciary, subject to the new rule. "If you say you're a fiduciary, you are a fiduciary under the fiduciary rule even if you're not." Wagner calls this the "loose lips sink ships requirement."
The BICE
Since the new rule widens the definition of a fiduciary, it applies to advisors who never considered themselves fiduciaries before, including those who sell commission-based products for retirement accounts. But under the Employee Retirement Income Security Act, which sets minimum standards for defined benefit and defined contribution retirement plans, and the IRS code, which oversees IRAs, a fiduciary advisor would be prohibited from earning commissions on investments for those accounts because that would not be considered to be acting in the best interest of the client.
The new rule provides exemptive relief to that prohibition via a Best Interest Contract Exemption, aka BIC or BICE, if the client approves of those product purchases for their account. There is no exemptive relief from the fiduciary rule by way of a BIC if the advisor has discretion over a client's accountand can invest account funds in commission-based products without the approval of the client.
The Four Types of BICs
There are four types of BICs that advisory firms can use between April 10, 2017, and Jan. 1, 2018, when the rule will become fully effective: Full-Blown, Disclosure, Streamlined and Transition, according to Wagner's nomenclature.
Without going into all the details – and the devil surely seems to be in the details – here are some BIC basics:
All BICs except the streamlined BIC cover advisors who receive variable compensation from any of the products they sell to clients, such as variable annuities. The streamlined BIC covers fee-based advisors only and is required when advisors recommend that the client roll over their employer-based retirement fund like a 401(k) into a rollover IRA or when the advisor recommends that a client transition from commission-based payments to a fee-based arrangement. The Transition BIC can be used only until Jan. 1, 2018, when the rule take full effect. Advisors selling commissioned products to retirement accounts would need the full BIC for IRA and non-ERISA accounts and Disclosure BIC for ERISA accounts.
The financial institution using the BIC would need to note that the advice was in the best of the client, charges no more than reasonable compensation, and makes no misleading statements about transactions, compensation or other conflicts of interest.
Reasonable Compensation
"Reasonable" generally means not considered excessive according to the market value and nature of the particular service or benefit, but Wagner noted that this doesn't mean the DOL will "condone all customary agreements" currently in effect.
