On Thursday, October 27, 2016 the Department of Labor issued its first series of FAQs regarding their Conflict of Interest Rule, due to be implemented April, 2017.
Most of the FAQs deal with the BIC Exemption (Best Interest Contract) which is generally applicable to Broker-Advisors, not RIA-only firms. Some highlights follow.
For a full report from the DOL see our website, https://somebodyelsesmoney.com/.
As we have stated before, if they satisfy certain conditions advisers and their firms can continue receiving compensation such as commissions, 12b-1 fees, and revenue sharing. They can sell or buy for retirement accounts certain debt instruments out of firm inventory. Ordinarily a principal transaction, even in bonds would be prohibited. Note, this is not a blanket permission slip on ALL principal transactions (ie; stocks). While the rules first apply on April 10, 2017, there is a transition period extending until January 1, 2018. During the transition period, advisers and their firms will have to:
– Give advice that is in the “best interest” of the retirement investor. (Prudence and loyalty).
– Under the prudence standard, the advice must meet a professional standard of care.
– Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.
– Charge no more than reasonable compensation.
– Make no misleading statements about investment transactions, compensation, and conflicts of interest.
The firm must also provide a notice to retirement investors that, among other things, acknowledges their fiduciary status and describes their material conflicts of interest. They must also designate a person responsible for addressing material conflicts of interest and monitoring advisers’ adherence to the impartial conduct standards.
The good news (yes, there is some) is the during the transition period, the DOL will emphasize assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions and others who are working diligently and in good faith to understand and come into compliance with the new rule and exemptions. Don’t just do nothing, though. The BIC exemption does not apply to roboadvisors, though. In justifying and explaining this decision the DOL showed its lack of understanding of just what they were.
The BIC exemption DOES apply to insurance agents who sell fixed rate and fixed indexed annuities to retirement investors, as long as they:
• Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption.
Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.
Charge no more than reasonable compensation; and make no misleading statements about investment transactions, compensation, and conflicts of interest. (Sound familiar?)
Then, there are pages and pages of requirements about compensation.
Our heads are spinning. We’ll go into more detail on Tuesday, if you want, but, basically:
The retirement customer can ask for a complete, exhaustive accounting of all fees (and you have to give it). You can’t do something just to enhance your compensation. Sales bonuses, contests and cash awards are disallowed, if they are intended (or reasonably expected) to cause the Advisor to recommend an investment not in their best interest. Try to enforce that one, DOL. Firm compensation schemes are under scrutiny.
IE: make sure the “grid” does not favor one investment over another, so that the advice would not be in the client’s best interest. Level fee advisors (Fixed: not rising or lowering based on assets) are good guys.
There’s more, but we have to go, it’s oats hour.
By:
Nancy Mustang and Marilyn Paint
Stay Tuned…