The new fiduciary rule that has been proposed by the Department of Labor (DOL) will have far-reaching implications for financial advisors of all stripes (not to mention their clients). This sweeping legislation will effectively elevate all advisors and other professionals who work with IRAs and qualified plans to a fiduciary status, which means that they are unconditionally required to act in the best interests of their clients and disclose all compensation that they receive for their services. But advisors are still in the dark about many facets of this rule, and how it will specifically affect their businesses and what they must tell their clients. Here’s what we know so far.

Nature and Scope

The new DOL rule will affect all advisors who receive any form of compensation from a third-party source, such as a mutual fund company or annuity carrier, to fully disclose all of the compensation that they receive from these sources to the client. Those who receive their compensation directly from the client may be exempt. For example, advisors who charge an annual retainer fee to their clients will not likely be affected by this legislation. But all planners and advisors who receive any form of commission or trailing fee from the products that they sell must disclose the dollar amounts of these payments to their clients. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)

Many advisors want to know whether the rule will grandfather all current accounts and only require these disclosures for new accounts. At this point, there has been no specific provision mentioned for current accounts, so advisors should probably prepare for this rule to apply to all of their accounts. Those who are in the know about the rule have stated that it is unlikely that existing accounts will be fully carved out as an exception to this rule. There have been several requests for this exception from advisors who spoke with the DOL, but it has not appeared in any clear form within the language of the bill that was released in April 2015.

There has also been no carve-out for advisors on the basis of licensure, which many thought might happen with this bill. But because it’s the DOL that is proposing this measure and not FINRA or the Securities and Exchange Commission (SEC), it broadly includes all professionals who work with tax-deferred retirement plans and accounts. There is no distinguishing between those who have securities or insurance licensure and registered investment advisors (RIAs). However, those who have clients with annuity contracts inside their IRAs or qualified plans will have to either satisfy the rules in the bill set forth for prohibited transaction exemptions or else move the client’s money into a different investment vehicle and force the client to incur the surrender charge for doing so if this has not yet expired. This is one key area where the language in the bill is somewhat murky. Many advisors are hoping that the bill will clarify this issue when it is released in its final form. (For more, see: Proposed DoL Rules: How They'll Impact Financial Advisors.)

12b-1 Fees

It will be possible for advisors to continue receiving this form of compensation as long as they follow the provisions in the Best Interests Contract Exemption (BICE) rule. This rule will require brokers and planners to disclose all commission income and other compensation or incentives that they receive to clients including these fees. It will also require them to unconditionally act in the client’s best interest regardless of all other factors as well as implement a written policy that addresses all possible conflicts of interest. An annual disclosure statement to each client providing a comprehensive breakdown of all direct and indirect fees and other compensation received will also become mandatory.

Companies will also be required to create and maintain a website that provides the public with a complete breakdown of the amount of compensation paid to planners for each product. These requirements will, of course, also result in a general increase in the amount of paperwork and disclosures that advisors and companies will have to provide on an ongoing basis. And while those who follow the tenets of this provision will legally be allowed to continue collecting commissions and other fees, there will also be pressure for advisors to restructure their compensation so that they do not. Planners who want to continue receiving these fees will need to make a point of learning the BICE rules in order to stay in compliance. (For more, see: Meeting Your Fiduciary Responsibility.)

But several major questions linger. For example, this rule will effectively disallow advisors to give advice to clients on retirement plan distributions. The rule language also fails to address what should happen if a client needs a product or service that the advisor is not licensed to provide. In this case, will the advisor be liable for failure to meet the fiduciary standard?

The Bottom Line

Needless to say, it appears that the rules surrounding the fiduciary bill in general and the BIC Exemption in particular look to be very complicated and likely to cause confusion for both advisors and their clients. Furthermore, the substantial increase in disclosure requirements will most likely require many firms to either exit the retirement planning business altogether or substantially increase their fees in order to cover the costs of the additional paperwork. And advisors may have little time to learn the details of these rules before they are required to obey them. The language in the current bill may also make advisors who follow the Best Interest Contract Exemption rules vulnerable to frivolous lawsuits and increased liability. This will in turn drive up the cost of errors and omission insurance for advisors, which will also have to be passed on to the public.

There may be a window of time accorded for advisors to adapt their practices to the new law, but exactly how this will work is also still unclear. At this point, most advisors are simply hoping that the final language in the bill will shed further light on its less developed parts and provide them with definite guidance in several key areas. (For more, see: How Likely is a New Fiduciary Rule in 2016?)

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