Contributed by Meghan Warren, Special Contributor
Recently, Secretary of Labor Alexander Acosta penned an op-ed for the Wall Street Journal announcing that the Department of Labor’s (DOL) long-debated fiduciary rule would not be delayed any further, and is set to go into effect on June 9.
But what does that mean for investment and wealth professionals?
At our Annual Conference Experience earlier this month, we had a number of speakers discuss the fiduciary rule—what it is, what it means, and where it’s going in the months ahead. ACE kicked off with a pre-conference workshop presented by Blaine Aikin, CFA®, CFP®, AIFA®, executive chairman, fi360, providing a crash course in the fiduciary rule; later in the week, Marcia Wagner, principal, The Wagner Law Group, discussed how the rule stands to impact wholesalers specifically (watch for a follow-up blog post on that topic). Here are some of the key takeaways from Aikin’s presentation you should know:
- The fiduciary standard will be broader, and many who were not subject to it before may be now. According to the rule, you qualify as a fiduciary if you provide investment advice either directly or indirectly for compensation, and a) indicate that you are acting as a fiduciary; b) establish via written or verbal agreement that you are providing individualized investment advice; or c) tailor your advice to a specific recipient with regards to investment decisions. Distilling the rule in its simplest terms, the DOL is aiming to hold more advisors to a “best interest” standard when dealing with clients.
- Determining whether you are a fiduciary under the new rule is largely tied to the process by which you provide advice. When acting as a fiduciary, investment consultants must act with loyalty—serving the best interests of their clients and avoiding conflicts of interest—and care, or acting with skill, diligence and good judgment. The proof here is in the process: How are you, as an investment consultant, providing advice to your clients? Understanding where your activities and process fall under the DOL’s rule will be critical to compliance.
- Certain types of financial communications do not fall under the new rule. Examples of these communications include educational communications, which provide generalized (i.e., not tailored) information and that enable investors to make decisions on their own; counterparty transactions (such as the sale of financial products to a fiduciary where the seller is not acting as an advisor); information furnished by platform providers, such as record-keepers and third-party administrators; swap transactions where the financial institution conducting the transaction is independent from the fiduciary and receives written acknowledgement of this from the fiduciary; and employee communications provided by plan sponsor. Some general communications may also be exempt from the rule if a reasonable person would not interpret those communications as providing investment advice.
- The rule does entail an exemption that could allow for variable compensation on certain products. The DOL rule contains a provision for the Best Interest Contract Exemption, or BICE. BICE may allow some advisors to sidestep some of the most onerous aspects of the new rule, but qualifying for the exemption can be burdensome in and of itself. The exemption requires a variety of steps, including written disclosures, in-depth contracts and meticulous record-keeping. At its heart, though, BICE requires three key elements to maintain compliance:
- Comply with the best interest standard required by fiduciary responsibility.
- Do not charge excessive compensation.
- Do not make misleading statements that could impact the client’s decision-making process.
Luckily for investment and wealth professionals, there is a grace period that will allow them to take the time to transition to compliance with the enhanced fiduciary standard. Many provisions will go into effect on June 9, but others will not be enforced until January 1, 2018. As a result, one would do well to begin assessing how they may need to change their policies and procedures over the next six months. IMCA’s Fiduciary Best Practices online course is a good first step. You can explore how the fiduciary rule works with other standards and explore a variety of opinions on the subject. Stay tuned to this blog for a follow-up post on some of the practical considerations and changes that the rule heralds for the industry.