The much-anticipated Department of Labor fiduciary rules will be unveiled on April 6, 2016. There has been a lot of speculation about what the final version will look like. Much of the focus has been on the potential impact on the brokerage world and those financial advisors who make some or all of their living from the sale of financial products. This focus has manifested itself in the sale of two brokerage units by American Investment Group and MetLife Inc., respectively. However, it is not only those compensated via commissions who will be impacted by these new rules. Fee-only advisors and registered investment advisors (RIAs) will also be impacted as well.

Differences with SEC Rules

The Securities and Exchange Commission's (SEC) fiduciary rules encourage RIAs to avoid conflicts of interest but do not explicitly prohibit them as long as the conflicts are disclosed to clients. The proposed DOL fiduciary rules are more along the lines of ERISA rules that govern qualified retirement plans such as 401(k) plans. These rules prohibit some certain transactions and don’t allow for conflicts of interest even with disclosures to the client. (For more, see: How SEC and DOL Fiduciary Standards Could Differ.)

Disclosure Required

There will be a disclosure option for advisors to recommend financial products or options that may not be considered to be in the client’s best interests. This will be in the form of an agreement called the Best Interests Contract Exemption or BICE. The BICE will need to provide full disclosure as to how much money the advisor will make from this product or investing approach and will need to be signed by the client.

This is widely considered to be geared towards those financial advisors who derive the bulk of their income from the sale of financial products and earn commissions. The BICE issue will likely also impact RIAs as well, especially in connection with a recommendation to rollover client assets from their 401(k) to an IRA. The new rules will likely increase the compliance costs for all financial advisors including RIAs and fee-only advisors. (For more, see: What the DoL’s Fiduciary Policy Means for Advisors.)

401(k) Rollover Issues

An area where even fee-only advisors and RIAs are likely to butt up against the new rules is the issue of 401(k) rollovers to an IRA. If a financial advisor suggests that a client roll their 401(k) balance to an IRA, this recommendation could come under scrutiny. If the client would encounter higher expenses in the course of this move it could be considered a conflict of interest under the new rules.

A main focus of this rule was originally thought to be preventing “toxic rollovers” by financial advisors who derive some or all of their compensation from commissions. In fact, the proposed rules will almost certainly put a crimp in rollovers to IRAs that would be directed to products such as annuities or expensive mutual funds. (For more, see: The Coming Fiduciary Rule: Advisor and Client Impact.)

Impact on Legitimate Advice

There are legitimate reasons why a fee-only advisor would recommend that a client or a prospective client roll their 401(k) balance to an IRA. These include:

  • Taking a relatively small balance and combining it with the rest of the client’s assets in order to fully execute the recommended investment strategy for the client.
  • Fewer investments and accounts for the client to monitor.
  • A desire for the client to convert the money from a traditional IRA to a Roth IRA as part of their financial and estate planning.
  • A limited investment menu in the client’s old 401(k) plan.

The focus on the potential conflicts of interest here might cause financial advisors to shy away from making the recommendation to roll these assets over even when this is the best route to go for a client. (For more, see: DOL Fiduciary Rule: RIAs See Negative Impact.)

Marketing Opportunity?

RIAs and fee-only financial advisors might potentially use the DOL fiduciary rules as a marketing opportunity. For example, RIAs might say something along the lines of: “We’ve always been held to a fiduciary standard.” RIAs might ask prospects whether their advisor has explained all of the fees that are actually imbedded in the financial products that they have recommended to them. Or they might ask if their broker has informed them that the fees on their wrap account in their IRA will be going up in response to the new fiduciary rules.

Additionally, these rules might create a shortage of qualified financial advisors. A similar type of rule was enacted in the United Kingdom and since then there has been a noticeable decline in the number of financial advisors. (For more, see: Proposed DoL Rules: How They'll Impact Financial Advisors.)

Fee Compression Issues

There has been a level of fee compression in financial advisor fees for a number of years now and the increased level of disclosure that will arise from these rules may accelerate this. Additionally, increased fee disclosure may prove to be a boon for low cost robo-advisors, especially among investors with smaller accounts. Vanguard’s Personal Advisor service is a hybrid robo that offers clients the opportunity to work with a human advisor in conjunction with the robo technology for 30 basis points. This might be a good option for smaller investors who feel that paying 100 basis points or more is too much.

The Bottom Line

The new fiduciary rules will have an impact on the financial advisory business regardless of how the advisor is compensated. The focus has been on those who sell financial products, but RIAs and fee-only advisors will be impacted as well. (For more, see: How Advisors Can Plan for Fiduciary Rule Changes.)

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