It's getting to be crunch time for advisors to ensure compliance with the DOL fiduciary rule. By April 10, 2017, advisory firms must adhere to what the DOL describes as "impartial conduct standards," acting in the best interests of the client.
They'll need to notify all retirement investors of their fiduciary status, describe any material conflicts of interest, and designate someone to be responsible for addressing material conflicts of interest and monitoring adherence to the new rule. Exemptions from best interest standards will be available through the use of Best interest Contract Exemption (BICE) or principal transaction exemptions and can be phased in up until Jan. 1, 2018, when full compliance is required.
Matt Matrisian, senior vice president of Strategic Initiatives at AssetMark, which provides investment, relationship and practice management solutions for advisors, has developed a list of questions for advisors to see how prepared they actually are for the new rule:
• Are you still unclear about the details of the final DOL rule and the responsibilities of becoming a fiduciary?
• Is the majority of your book of business in retirement assets?
• Are the majority of the products you offer commission-based?
• Are you receiving any non-levelized compensation?
• Are you still waiting to speak to your clients about the rule?
• Have you not yet segmented your book of business?
• Are you lacking a formalized compliance and documentation process to comply with the final rule?
• Are the majority of your commission-based assets in products that would require a surrender charge or are difficult to transition?
• Are the majority of your commission-based mutual funds in direct business that is difficult to supervise under the fiduciary standard?
If an advisor answers "yes" to five or more of these questions, he or she should "begin preparing immediately," according to Matrisian.
Matrisian offered a few recommendations to start:
1. Segment Clients and Segment Revenue Streams
The key question to answer here is whether a commission-based client has enough assets for the advisor to move that client to a fee-based structure, which Matrisian said can be good for business.
Not only does such a structure increase fees as assets grow but "there's less regulatory onus and a better business model with recurring revenue and higher valuations as a result," said Matrisian. "It's important for advisors to move to fee-based relationships when appropriate."
2. Switch Investments to Lower Cost Equivalents
Matrisian recommends that advisors move client accounts away from higher fee mutual funds, such as A, B or C shares which have loads or trailing fees, to cheaper institutional shares (which have larger minimums but lower expenses) when possible and from commission-based annuities to fee-based annuities.
