The Department of Labor is on the verge of implementing its rule redefining fiduciary on retirement accounts – are advisors and firms prepared for this new ERISA rule?
While there are many outstanding questions about what the final rule will actually say, a big concern seems to be the amount of time given for advisors and firms to implement and comply with the new standard.
An implementation period of at least eight months is expected, although it’s unknown if that time frame will change in the official rule.
Robin Traxler, vice president of regulatory affairs & associate general counsel for the Financial Services Institute, thinks the eight-month implementation time frame is “unworkable.”
According to Traxler, FSI’s members are saying they will need three years to comply to the rule. FSI has around 35,000 financial advisor members.
There will be technology changes that firms will need to put into place under the new rule, and often a firm’s IT is budgeted out two or three years in advance, Traxler said.
“Firms need time to budget for changes,” Traxler said during a webcast hosted by ThinkAdvisor.
This was one of many concerns that FSI formally submitted to the DOL in a letter, suggesting firms have at least 36 months to implement changes.
American Portfolios Financial Services Inc., who sponsored the webcast, has already done a lot of work in preparation for the impending rule – but a major concern is the time needed to comply, said Keith Kelly, vice president of sales and new business development at American Portfolios.
“Time is going to be the enemy,” Kelly said during the webcast. “Void of more time is what’s going to make it difficult.”
Many in the industry, such as the Financial Planning Coalition, have advocated for a limited extension to the eight-month period of no more than 12 months.
“That would be fantastic, and we know our partners and us would be advocating for that extension,” Kelly said. Adding, “There could be hundreds of thousands or millions of accounts to be converted in that timeline. There’s isn’t enough time in a day.”
For the past year American Portfolios has been working on educating and guiding its advisors on the new rule, and in December it launched a committee with 12 members of its staff specifically focused on the DOL fiduciary rule.
“For past year or longer, while we didn’t take an approach that action needs to be taken immediately, we did prudently guide our advisors that we need to accept that our industry is significantly shifting,” Kelly said.
In addition to educating advisors on the proposal, the firm has also engaged industry experts, leaders of various product companies and legal counsel in order to educate their advisors more fully.
Kelly said American Portfolios’ goal is to prepare its advisors for “how to transition if that rule came out tomorrow.“
One way American Portfolios is doing that is by telling advisors to start analyzing their books, their profit and loss statements (P&L), and how they serve their clients and how that could shift in a post-DOL world.
“[The financial crisis was] the first time many advisors had to understand P&L and how they made money,” Kelly said. “What we’re going through with DOL is similar analysis of advisors’ revenue streams.”
American Portfolios is helping its advisors to begin to set best-interest-contract thresholds, segment their client bases by asset levels and determine how to serve clients at different levels.
According to Fred Reish, a partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group, most of the work and capital will need to be deployed over the next 12 months to become compliant with the new rule.
Up front, he said, people will have to put in place the systems, services and products that will be pure-level fee for those who won’t need the best interest contract exemption. For those using exemptions, programming will need to be put in place and advisors will need training, Reish said.
“I think that pretty much has to [be done] by Jan. 1,” he said.
Reish added there will be some ongoing work needed.
“A prudent process will look different than a sales process. They’re not going to put sales-oriented advisors through [only] one training session,” Reish said. “Younger advisors will adapt the fastest, but people with 30 years sales experience are going to have a harder process.”
Reish has experience advising insurance companies and investment managers of the development of products and services that are consistent with ERISA's fiduciary standards and prohibited transaction restrictions, including retirement income investments and guarantees.
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