The Institute for the Fiduciary Standard applauds the Department of Labor’s historic effort to update ERISA after 40 years. The transformative changes in the markets, investing and the employer-employee relationship since 1974 call out for major reform. The independent and credible research that quantifies the costs to investors in higher fees and lower quality investments, due to antiquated rules, is compelling.
DOL’s bold leadership in acknowledging and articulating the gravity of the problem, proposing bold rule-making, and listening to and then challenging opponents of the rule to get around the table and help improve the rule is to be applauded.
The redraft’s BICE—Best Interest Contract Exemption—fundamentally re-engineers ERISA’s foundation by allowing many previously prohibited compensation arrangements. As DOL states, the BICE seeks to:
“Preserve beneficial business models by taking a standards-based approach that will broadly permit firms to continue to reply on common fee practices as long as they are willing to adhere to basic standards aimed at ensuring their advice is in the best interest of their customers.”
DOL sets out the standards’ requirements. The firm and the broker/advisor must
“Contractually acknowledge fiduciary status, commit to adhering to basic standards of impartial conduct, adopt policies and procedures reasonably designed to minimize the harmful impacts of conflicts of interest, and disclose basic information on their conflicts of interest and the cost of their advice. Central to the exemption … (is) to meet fundamental obligations of fair dealing and fiduciary conduct to give advice that is in the customer’s best interest; avoid misleading statements; receive no more than reasonable compensation; and apply with applicable state and federal laws governing advice.”
In other words, the firm and the broker/advisor are asked to do what most investors believe their broker/advisor already does, or should do, today. Or, more significantly, what a broker/advisor implies doing in meeting a best interest standard.
What are they asked to do?
To promise in writing to do what’s right.
Charge reasonable fees.
Follow policies to manage conflicts, give impartial advice and tell the truth.
Disclose conflicts and all fees the investor pays and the firm receives, and follow state and federal laws.
It’s Common Sense: Conflicts Cause Harm
In sum these practices seek to apply the fiduciary duty of loyalty and reflect the corollary enduring principle that is the very focus of the DOL proposed rule. This principle has been so completely woven into law and ethics and culture, and so often expounded on by jurists throughout history, that it is today considered a given, not needing explanation.