When the Department of Labor issued its final ruling on retirement investment advice earlier this year, the move signaled a massive shift within the financial services industry. Gone is a “suitability” standard that guided many transactions in the $25 trillion retirement services market. In its place will be a fiduciary standard with guidance that places the best interest of the client before advisor profits. For many, this shift from a transactional/commission to a comprehensive planning/fee-only approach will be drastic. However, at Beacon, we have already worked under a fiduciary standard and believe this to be a great opportunity for the RIA community with $250-350 billion of expected asset growth potential for our niche according to a recent A.T. Kearney study. 1
We’ve already begun to see changes within the industry. To comply with the ruling, some companies, such as State Farm, have announced they will change the way the company and its agents handle some retirement accounts, and will begin selling and servicing mutual funds, variable products and tax-qualified bank deposits through a self-directed customer call center. In the case of Edward Jones, the firm will cease mutual fund access for retirement savers in commission accounts and cut investments minimums to comply as recently reported in InvestmentNews.2
In addition to those changes, many companies and organizations have adopted a legal stance against the DOL, resulting in a litany of lawsuits. The U.S. Chamber of Commerce, The National Association for Fixed Annuities (NAFA), The American Council of Life Insurers (ACLI) and National Association of Insurance and Financial Advisors (NAIFA), and the Indexed Annuity Leadership Council are among those filing suits against the DOL.
However, what many within the industry are worried about is the potential for lawsuits that consumers could file against them if they were to fail to uphold DOL compliance in their client transactions. In short, if an advisor or company is not compliant, then in our opinion, they are setting themselves up for potential litigation. To combat potential issues, we have provided a set of compliance guidelines for you to follow.
The initial changes from the DOL will go into effect on April 10, 2017 (the applicability date), when advisors and companies will be expected to uphold the fiduciary standard. Initially, industry professionals will have an additional “transition relief” period which allow advisors to continue to work on fulfilling the many requirements associated with BIC exemptions. In addition, during this relief period, advisors will also be able to work through the many grandfather clauses built into the new regulations to ensure that those client arrangements existing prior to April 10, 2017, are fully compliant with the new standards. This transition relief period will run until January 1, 2018, at which time firms and their advisors are expected to be in full compliance with the new regulations. Though this temporary relief period may give advisors some extended time in getting their BIC exemptions and grandfathered clients in compliance, Beacon strongly suggests that all advisors begin working towards complete compliance as soon as possible.
1. Act as a Fiduciary. As a fiduciary, you are responsible to always act in the best interest of the client and to remove any conflict of interest. When working with clients that means not only working in their best interest, but also putting their interests ahead of you or your company’s bottom line. When offering a product to a client, is that guidance taking into account the totality of the client’s retirement plan? In other words, are you taking a comprehensive approach to any retirement-related transactions? And, are you disclosing any potential conflicts of interest that could be in play in the transaction?
2. Understand and Adhere to BICE. If you want to keep your business intact and thriving (and want to avoid compliance issues) then you will need to provide clients with a Best Interest Contract Exemption (BICE). The BIC exemption is intended to provide some relief for advisors and financial institutions to permit the use of many of their current compensation models as long as they acknowledge their fiduciary status and are transparent about the transaction. BICE can be used for many of the assets and products currently offered to retirement plan and IRA investors, as long as the advisor is providing non-discretionary advice.
3. Get Help! Chances are you will have to take on some of the DOL due diligence education yourself. With the new DOL standards that will be in place, this is no time to play fast and loose with compliance. If you need back office, technology or strict compliance help, then in addition to working with your own back-office compliance team, be sure to leverage the knowledge and services of your investment partners like Beacon.
With all of these changes taking place in the industry, it’s vital that you are able to hit the ground running once they go into effect to maximize on this potential opportunity of assets in motion. At Beacon we are committed to working with advisors, RIAs and broker-dealers to make sure they have a clear idea of what they will need to remain compliant under the DOL. In early 2017 look for webinars, articles and further information on how to comply. For further assistance implementing any of the tips or ideas above, contact your wholesaler today!
Sources: 1 A. T. Kearney Study: “The $20 billion impact of the new fiduciary rule on the U.S. wealth management industry”https://media.thinkadvisor.com/thinkadvisor/article/2016/09/22/at-kearney-dol-perspective—cost-of-compliance–.pdf