THE COMPLETE GUIDE TO THE DOL RULE: NOW WHAT DO I DO? 4-5-2017

FIDUCIARY RULE COMPLIANCE ROADMAP from somebodyelsesmoney.com.

COMPLYING WITH THE DOL RULE AND THE BIC EXEMPTION DOES NOT HAVE A “ONE SIZE FITS ALL” SOLUTION. HOW YOU HANDLE THE RULE DEPEND ON YOUR BUSINESS MODEL, RESOURCES, TECHNOLOGY, CLIENT BASE AND GROWTH PLANS.

STARTING FROM A 2 PAGE RULE ABSTRACT WE WORK WITH YOU TO DEISGN A DETAILED WRITTEN SOLUTION FOR YOUR FIRM.

YOU DON’T HAVE TO CHOOSE BETWEEN A COOKIE CUTTER TEMPLATE-DRIVEN SOLUTION AND YOU DON’T HAVE TO HIRE 400 COMPLIANCE OFFICERS OR A TEAM OF REGULATORY LAWYERS. WHILE EACH PLAN IS CUSTOMIZED OUR EXCLUSIVE SERVICE DOES NOT COST THOUSANDS OF DOLLARS. WE CAN EVEN BUILD THE COMPLIANCE PROCESS AND MONITOR ITS EFFECTIVENESS FOR YOU.

CONTACT US FOR A DISCUSSION ABOUT THE RULE AND HOW WE CAN HELP YOU DEVELOP YOUR SOLUTION.

JOHN LOHR john@somebodyelsesmoney.com

ATTORNEY JOHN LOHR AND HIS TEAM AT SOMEBODYELSESMONEY.COM HAVE A COMBINED 100 YEARS IN HELPING FIRMS REACH PRACTICAL FIDUCIARY SOLUTIONS.

AUTHORS OF THE INDUSTRY BOOKS :

THE FIDUCIARY SALE,INVESTING AS A FIDUCIARY,SOMEBODY ELSE’S MONEY,
USING ERISA TO DEVELOP NEW BUSINESS,INVEST ACCORDING TO ERISA.

CONTRIBUTORS TO SEEKING ALPHA’S EXCLUSIVE RESEARCH SERVICE

Disclosure:  somebodyelsesmoney.com is a provider of information and is not affiliated with any investment service provider, Advisor or broker.  We do not provide personalized investment advice.  WE ARE IN SEARCH OF THE ETHICAL ADVISOR.  We listen to those who are.

 

ABSTRACT OF PROVISIONS OF THE DOL RULE AND THEIR IMPACT:

 

1. Definition of Fiduciary

Anyone who receives compensation for providing advice to a Plan Sponsor, Participant or IRA owner.  Advice must be impartial and in the best interest of the client.  Historically, the penalty for breaching your fiduciary duties would result in personal liability.  Fiduciaries may include brokers, advisors, and insurance agents.

2. Financial Incentives

Firms must ban financial incentives for advisers that encourage or incentivize them to not act in the client’s best interest.

3. Compensation on a Website

Firms must disclose compensation arrangements on a webpage and by making sure customers are aware of their right to all fee information.

4. Common Compensation/Small Plans

Firms and advisers may continue receiving the most common forms of compensation for offering investment advice to retail customers and small-plan sponsors, including commissions and revenue sharing as long as they comply with BICE (Best Interest of the Client Exemption:  below)

5. Product Sales

Brokers can continue to sell products and services to small Plans (ie: Under $50 Million)

Firms can set own compensation types.  The contract exemption allows advisors to collect commissions and compensation from revenue-sharing arrangements as long as the advisor agrees to put the client’s interests first, charge only “reasonable” compensation and avoid “misleading” statements about fees and conflicts.

6. Assets Not Limited

The rule also does not limit the types of assets retirement plans can invest in, including listed options, non-traded REITs and variable annuities, under the so-called “best interest contract exemption.”

7. Annuities Allowed as Long as Applied to BICE

Firms are allowed to sell insurance products like variable and indexed annuities under the best interest rule.

8. In House Products Allowed

Advisers may also recommend some in-house investment products, branded with their firms’ names, as well as insurance products such as variable fixed and indexed annuities.

The Secretary of Labor has said, for example, that an employee of MetLife Inc. wouldn’t be obligated to advise clients about offerings from a competitor, like New York Life, so long as the adviser has a reasonable basis to believe that MetLife’s own products are in the best interests of the clients

9. Education is not fiduciary advice

Education is not included in the definition of retirement investment advice, allowing advisers to offer basic information without acting as fiduciaries. The rule also does not impose a fiduciary mandate on statements made in “general circulation newsletters, television, radio or public media talk show commentary or remarks at conferences.”

10. Potential client communication does not require a contract initially

Under the rule, financial advisers may communicate with potential clients before signing a contract.  While the contracts remain in place under the final rule, they can now be as short as a paragraph, The DOL said they can be signed later along with other paperwork at the time when customers open accounts.

11. Advice must be best interest/contract/in writing

Firms must tell new clients in writing that they are acting in their best interest, and any advice given before a contract is signed must be covered by the contract and meet the best interest standard.

The contract can be as simple as a sheet of paper or a paragraph attached to one of the other documents the account holder is signing, Perez said.  The exemption also permits existing clients to agree to the new contractual protections by “negative consent.”

12. Implementation

To give firms more time to adapt to changes, the rule will be implemented in phases. The rule, requiring broker-dealers who provide advice to follow a “fiduciary standard,” will take full effect on Jan. 1, 2018, according to the Labor Department.  Right now, on June 9, 2017, the “broader definition” of fiduciary will take effect, but to take advantage of the BIC exemption, firms will only be required to comply with more limited conditions, including acknowledging their fiduciary status, adhering to the best interest standard, and making basic disclosures of conflicts of interest,”  The DOL has been remarkably unclear in announcing theJune 8 delay date, and it must be pointed out that the January 1, 2018 date may be moot.  We’ll follow and keep you posted.

13. BICE

The Best Interest Contract Exemption requires advisers to act as fiduciaries, but also gives them flexibility in compensation arrangements, allowing them to charge commissions or take revenue sharing from mutual funds provided they make disclosures to the clients, and contract with them.  This new PTE will allow firms to continue to set their own compensation practices so long as they, among other things, commit to putting their client’s best interest first and disclose any conflicts that may prevent them from doing so.  Some provisions of BCIE include:

Existing Clients: Firms simply have to send a notice telling clients that the firm has taken on new obligations, unless the customer says they don’t want these rights. A simple email or letter will suffice, The DOL said.

Grandfathered existing investments: The BIC exemption includes a grandfathering provision that allows for additional compensation from previously acquired assets

Conflict disclosure: The contract must also direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.

Disclosures: The disclosures required under the contract have been reduced, including the elimination of the one-, five- and 10-year projections of returns and fees at the point of sale.

Level Fee – Rollover: The exemption in the final rule also allows investment advisers who charge a “level fee” to provide advice to clients about rolling over assets from 401(k) plans to IRAs without having to sign the contract as long as they can show that the rollover is in the client’s best interest.

Fee disclosure: SO far, the rule eliminates the proposed requirement that advisors acting under the exemption provide clients with an annual transaction disclosure detailing fees and costs.

Conflict disclosure: The firm must warrant that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients’ best interests and has adopted measures to mitigate any harmful impact on the client from those conflicts of interest.  They also must clearly and prominently discloses any conflicts of interest, like hidden fees often buried in the fine print or backdoor payments, which might prevent the adviser from providing advice in the client’s best interest.

14. Congressional rhetoriic

The Rule t is likely to be challenged at least in Congressional rhetoric for the                   coming years.

15. Lawsuits: Previous suits have been unsuccessful, but there may be more. We will have to see how that plays out in the coming days and months.
16. BD Impact
17. A common solution may be that advisers and brokers will be required to work with providers who have third-party 3(21) nondiscretionary and/or 3(38) discretionary investment advisers on their platforms. For example, representatives of a broker-dealer would be required to recommend that plan sponsors use the platform’s third-party fiduciary adviser to select and monitor the plan investments. In that way, an adviser and the broker-dealer will not be fiduciaries for purposes of selecting the investments. Note, though, that under the fiduciary rule, a recommendation of a fiduciary adviser (e.g., the 3(21) or 3(38) platform adviser) is, in its own right, fiduciary advice.
18. By extending the implementation a few months brokers have some flexibility to keep touting their firm’s own mutual funds and other products; and curbing the paperwork and disclosure requirements.
19. If a broker is simply in the role of executing an order to buy or sell without providing any recommendation, that transaction does not constitute investment advice. In such circumstances, the broker has no fiduciary responsibility to the plan sponsor. The implementation extension means firms can continue offering commission-based advice to clients for whom it is the best option.
20. To provide level-fee investment advice to plans, a broker-dealer may need to act under its RIA registration. The level fee will be accomplished, by and large, either through expense recapture accounts or by payment from plan assets.
21. Advisory/BD Impact

We will all have to adopt policies and procedures designed to ensure that adviser provide the best interest advice, and prohibiting financial incentives for advisers to act contrary to the client’s best interest.  Some data retention requirements are eliminated, such as detailed data on inflows, outflows, holdings, and returns for retirement investors. Now firms have to retain only the records that show they complied with the law (in this case, the BIC exemption), as they would in other situations.

18. Insurance Company Impact

New preamble language emphasizes that fees are not the only factor in making investment decisions which and gives firms more flexibility on how to comply with disclosure provisions.  This should make it easier than expected for insurance firms to recommend their products.

19. IMPACT: Training

Firms will have to train and monitor the many employees who have never been fiduciaries, as well as draft new disclosures for client paperwork.

 

 

 

So, HOW DO I COMPLY?

So, what does an Advisor or brokerage firm do:

1. Drop out of the business?
2. Start a Robo-advisor?
3. Quit selling insurance?
4. Look real hard at ETFs, so you don’t get left behind?
5. Nothing?
6. Pay off your debt in anticipation of a pay cut?
7. Move all the business to fee-based and assume a fiduciary role?
8. Something else? Probably the best solution, this here “number 8”.

One firm had a great idea, from a business perspective: State Farm.  Starting in April, 2017 they will only sell and service mutual funds, variable products and tax qualified bank deposit products through a self-directed customer call center. No, it doesn’t help Advisors, but its a good business decision. Still their financial advisors can concentrate on insurance and fee-based fiduciary products, if they allow it.

Morgan Stanley and Merrill Lynch have stated that they are adopting the fiduciary standard regardless of where the Rule goes.  (Not a stretch for MS, because their hierarchy of predecessor firms back to EF Hutton have adopted fiduciary standards since the 70’s.

Quandary? Yes. Easy to solve? Yes. Complying with the Rule is not that complicated despite what those lawyers hypothecate about. Specifically:

Broker or Advisor, make prudent decisions that are justifiable as being in the                    client’s best interest. Specifically:

Disclose all the fees (Yes, including yours).

No “double dipping (You can’t collect a 12b-1 fee and an advisory fee on the                   same account.)

Have a documented process to discuss with your client an IRA rollover from a                  401k.

Forget about A share mutual funds.

A special note to brokers: The BIC exemption is not rocket science, and if you have an ethical approach to your business, you can comply with it. Such as:

You can still sell commissioned products to Plans and participants. Sure, you                  might have to have a few more disclosures such as telling clients how much you                       actually make on the transaction. You still have the “Best interest consideration                      that better be documented”. Like I said earlier, if you don’t want to disclose your                 fees, maybe you should consider a sales job at Shoes R Us in Paintball,                             Arkansas.

You’ll need a new contract. We have a template. You will need website                             disclosures.

You can still sell REITS, Hedge funds or annuities to a retirement plan. It requires           a process and meeting the best interest test.

“Fiduciary” is nothing to run from. All those independent IAs that have been                     selling that “they are a fiduciary and brokers are not” will now have no                                competitive advantage. STEP UP!

Let us consider the various fundamental provisions of the new rule and how they apply in more detail.

The first fundamental provision of the rule is that Financial advisors must be a fiduciary of their client’s assets and acknowledge that in writing. Responsible advisors recognize and acknowledge in their contract and documents that their firm and every financial advisor who renders advice on investing to clients on their behalf is a fiduciary.

Any advice or recommendation to a client must be “in the best interest of the client” and must be justified as so.  One fundamental proprietary and patented goals driven process begins with a thorough analysis of the client’s financial circumstances and goals for the future.  Responsible advisors prepare a Financial roadmap which is designed to meet or exceed these goals and amend the plan as clients’ financial circumstances change.   If a client is ‘off track”, they recommend or take discretion for the client to rebalance the portfolio so that the client is back in that comfort zone.  They, and the client, are always working in the Client’s best interest.  For this reason, firms must ban financial incentives which could cause an advisor’s advice to be not in the client’s best interest.  A responsible Advisory business is always fee based and keeps costs under control by strategies such as utilizing low expense ratio EFTs and Funds.

A full disclosure of all fees, including fees on transactions, fees on holdings, fees paid to investment providers, and fees to the Advisor must be posted and available on a website to which the client will be referred. Responsible advisors disclose their fees and their Advisors’ fees completely and make that available to every client.

Advisors can give advice on rolling over a 401k into an IRA, but: Rollover advice and the recommendation of other investment professionals (funds, money managers) becomes a fiduciary activity. IRA rollovers out of a 401k have to be proven to be in the best interest of the client.  Fees will have to be comparable unless it can be shown that there are additional services the client gets for a reasonable cost.  Responsible advisors have 401k processes to document each rollover before it is converted.

There is a requirement for a wide array of available funds for participants to pick from.  Advice on a limited menu of investments will make it harder to show that an investment is in the best interest of the client.  This mandates a diversification of options.

Responsible advisors have to render advice to the client that is solely in their best interest and is handled ethically with no inherent or presumed conflicts of interest.

YOU’RE ALREADY PREPARED IF YOU HAVE… 

1. Acknowledged that you have fiduciary responsibility from giving advice to retirement Plans, including 401Ks and also IRAs.. Included advice-giver fiduciaries are Advisors (RIAs and their IARs), Brokers and Insurance Agents who receive compensation from retirement plans.
2. A practice of rendering advice to retirement plans, including 401ks and IRAs that can be justified as being “In the best interest of the Client”.
3. A Firm that bans financial incentives which could cause an advisor’s advice to be not in the client’s best interest.
4. A full disclosure of all fees, including fees on transactions, fees on holdings, fees paid to investment providers, and fees to the Advisor posted on a website to which the client will be referred.
5. A client agreement that makes these disclosures
6. Investment products like listed options, annuities, proprietary products, REITS to sell to Clients, and they adhere to the Best Interest Contract Exemption (BICE). Which means an agreement with the client that has a clause stating that any advice will be in the client’s best interest, that only “reasonable” compensation to the advisor will be charged and has no misleading statements about fees and potential conflicts, among other provisions.
7. IRA rollovers out of a 401k that you can prove are in the best interest of the client.
8. IRA and 401k Fees that are comparable or have additional services the client gets for a reasonable cost.
9. Product and ERISA training so that you are clear about making recommendations that are only in the best interest of the clients and that your fee structures are completely understood.
10. High front end loads in fixed and Variable annuities that are justified as in the Client’s best interest, considering all factors, including fees.
11. Your fee for advice model are leveled so as to eliminate any potential conflicts and adhere to the Best Interest of the Client provisions.
12. Documentation that rolling a 401k into an IRA advisory account is in the best interest of the client. (i.e., if the total cost under the advice model is not more than under the Plan, or the client will be getting additional planning or other services at a reasonable cost.)
13. Compartmentalization of household fees so that management fees and expenses relating to the 401k or IRA accounts are disclosed separately from the non-DOL accounts.
14. A guideline range of consistent acceptable pricing for investment and planning services charged by advisors.
15. Disclosure of any and all potential (or actual) conflicts of interests.
16. Advisors that can provide a non-individualized platform of funds to Plans which the Plan can then select from if they state they are not providing individualized advice or acting as a fiduciary.  However, it would not likely warrant an ongoing asset-based fee, if no advice is given.
17. Only reporting on fund investments, (like Morningstar reports).  You won’t be a fiduciary for just that will be ok, but they are so widely available, there is little value to them, so it might not warrant any fee.
18. Investment education for participants.  It also is not a fiduciary function by itself.
19. A non-individualized platform of funds to show to Plans which the Plan can then select from, as long as you state you are not providing individualized advice or acting as a fiduciary.
20. An account opening and ongoing planning and investment management process that includes a place to document your discussions with the client that supports regulatory compliance.
21. A website that meets additional fee disclosure requirements.
22. Ongoing client plan updates and account/Household investing and rebalancing,
23. Educational resources available to make sure you and your Advisors are adequately equipped to service their clients as fiduciaries.
24. Policies and procedures designed to ensure that you and your advisors provide best interest of the client advice, while prohibiting financial incentives for advisers to act contrary to the client’s best interest.
25. An awareness of clients that may be impacted by the changes due to the inclusion of any IRA or 401k account in an advised plan where a fee is being charged (does not include 401k that are aggregated in a plan, with no charge).
26. Determined that accounts that can be moved to an advice model without disadvantaging the client, and have laid the groundwork to begin the transition.
27. Discovered clients that would be disadvantaged by an advice for fee model (like a surrender charge for on an annuity for example).
28. Knowledge of certain grandfathering rules for accounts already invested in certain products, and those that will be allowed to remain with the broker under their old model.
29. A copy of Douglas Adams’ The Hitchhikers Guide to the Galaxy prominently displayed on your bookshelf. The cover says, “Don’t Panic”.
30. Us to help you.

Thanks for listening.

John

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