Best-Interest Contract Exemption (BICE)

DEFINITION of 'Best-Interest Contract Exemption (BICE)'

The best interest contract exemption (BICE) is a process that allows investment advisors to collect commissions, revenue sharing, or other types of compensation as long as specific requirements are met. BICE is related to the Department of Labor’s fiduciary rule that expands the definition of a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). The expanded definition includes people who provide investment advice and buy or sell recommendations in ERISA-covered plans in addition to other individual retirement accounts (IRAs). The new rule moves these investment advisors into the role of fiduciary investment advisors, meaning that they must follow more stringent rules and avoid conflicts of interest. Consequently, advisors who receive additional commissions if a client picked a particular product may be in conflict if similar products that do not pay a commission are deemed to be comparable. BICE allows the advisor to still receive that commission if they enter a contractual agreement stating that he will act in the best interest of the client and avoid any misrepresentation of the options.

The best interest contract exemption is also referred to as the BIC exemption.   

BREAKING DOWN 'Best-Interest Contract Exemption (BICE)'

The Department of Labor’s (DOL) fiduciary rule is not scheduled to come into full force until January 2018, but there is widespread concern in the financial services industry. In the original draft, there was a requirement of ongoing disclosure of compensation over the life of a product, no clear limits on liability which would be decided by the plaintiffs’ bar, and the rules were set to start in less than a year. Some of these concerns were addressed in later versions, but the industry as a whole is concerned that the process for a best interest contract exemption is still too much of a burden.

BICE and Financial Services

Financial services companies have warned that the result of the expanded fiduciary definition will limit professional investment advice for middle and low income savers. This is simply because these potential investors will not generate enough income to justify the costs of pursuing a BICE. Instead, these clients with smaller account values may need to turn to robo-advisors or other low cost options for investment advice. Firms that continue to provide investment advice under a BICE will likely face higher costs as internal policies and procedures are updated for compliance.

Given that the compliance costs on any new rule aren’t fully understood until after implementation, there will be a phase for the change. During this time, financial service firms will run cost benefit analysis on the BIC exemption to see whether it is a practical alternative. If it is not, then the industry may need to explore new business models for serving clients in different income brackets.