The Department of Labor’s (DOL) new fiduciary rule is nearing the end of its proposed phase and will soon become law. This rule will have a far-reaching impact on the business and sales practices of financial planners and advisors. Those who work with retirement plans and accounts will be wise to begin adapting to the coming changes that this legislation will bring as soon as possible. Those who are prepared for this new era when it arrives will experience a lower level of frustration and hopefully be able to minimize the level of disruption that it will bring to their practices.
Provisions of the Rule
There are several areas where the DOL rule can affect your practice. At the core of the legislation lies a revision of the definition of fiduciary that the industry has previously followed since the passage of ERISA in 1974. The new rule defines any financial professional who works with IRAs or qualified retirement plans as fiduciaries. Anyone who provides advice or recommendations pertaining to IRA rollovers is also a fiduciary, regardless of whether the advisor actually handles the assets or not and irrelevant of how they are paid. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)
The rule does provide advisors with a way to continue earning commissions under the Best Interest Contract Exemption (BICE). BICE requires advisors to sign a binding statement with the client that clearly outlines all possible sources of third-party compensation (such as from mutual fund companies and annuity carriers) and all possible conflicts of interest. The exact provisions of this contract have not been released, but it will be a substantially clearer and more complete disclosure of compensation received by the advisor than any document previously employed in the financial industry.
How to Prepare
As with most governmental legislation, the provisions of the new act will require a substantial increase in the amount of paperwork and procedure that is required to stay compliant. Advisors who want to stay ahead of the curve can take the following steps to ensure the greatest possible level of preparedness when the final version of the rule becomes law. (For more, see: Proposed DoL Rules: How They'll Impact Financial Advisors.)
- Start analyzing the financial impact of the rule. If you work primarily on commission, you may be wise to begin exploring a fee-based structure, or at least a fee-based alternative to your current platform. You will still be able to earn commissions under the BIC Exemption, but your revenue may decline substantially when your customers see how much you are earning relative to the services that you provide. Now is the time to plan for what may be a drastic revenue crunch in the near future. Get a head start by getting a concise breakdown of exactly how much revenue you receive from your retirement clients and where it is coming from. You can also get a clear breakdown of the types of products and services that you are providing to them. This can help you to see exactly how the rule change may affect your revenue stream.
- If you provide any type of advice regarding retirement planning, then you should revise your schedule of fees to include this if it is not there already. You will also need to update all of your marketing materials and avenues, such as company brochures and advertising materials, your firm’s website and any type of agreement pertaining to investment advice and/or management. You can also upload all of your trading and brokerage statements online so that clients and regulators can quickly see what fees are being charged, along with any other form of compensation that you may receive. (For more, see: Meeting Your Fiduciary Responsibility.)
- Update all of your official federal and state documents that you have filed, such as your Form ADV to show that you provide individualized investment advice for IRAs and qualified plan accounts.
- Create a central online archive for all of your company’s documents and filings. This will give you and other stakeholders as well as regulators easy access to all of your firm’s documents.
- Employ your technical staff to create and implement a new compliance program that will automatically flag any trading or other financial activity that may come under the DOL rule. Once the new rule is released in its final form, you can make any further changes or additions that are necessary.
- Go over your firm’s business practices and procedures. If you are in the habit of fully disclosing all of the compensation that you and/or your staff receives for services rendered, then you should be in good shape in this area. If you are not, then it’s time to start including it. Full disclosure will become a way of life under the new rule, so this is the time to start making changes in this area. (For more, see: Fiduciary Designations for Financial Advisors.)
- Consider new or different business models or methods of client segmentation. If the new rule is going to force you to change your business model, then don’t wait to begin exploring the model that will work best for you. You may want to break your business model down into subcategories in order to service various types of clients, such as retirement clients and trading customers. The new rule will affect different types of customers and transactions in different ways, so you may end up hurting yourself with a single broad-brush approach.
- Get expert help. This last and most obvious suggestion can save you much time, effort and frustration as you try to adapt your firm to the coming regulations. Financial attorneys and retirement industry experts already have their ears to the ground on the rule change, and you may be able to get information from them more quickly than anywhere else.
The Bottom Line
Despite the fact that major changes are clearly around the corner for the retirement planning community, some advisors are holding off on making changes and taking a “wait-and-see” approach. This is a risky proposition at this point, given the high probability that at least 75% of the provisions in the proposed rule will appear in its final form. Advisors who want to stay ahead of the curve should start planning now with a thorough assessment of all facets of their practices. (For more, see: What the Fiduciary Proposal Means for Annuities.)