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Industry Spotlight > Broker Dealers

Experts: ‘Post-DOL World’ Is Coming

By Janet Levaux

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Leaders of the Financial Services Institute warmly welcomed about 300 attendees to the group’s Financial Advisor Summit 2015, which took place in early November in Washington, D.C. But they left advisors and other guests with a sober reminder of what lies ahead: a final version of the Department of Labor’s new fiduciary rule is expected in the first quarter of 2016.

“It’s time to get under the hood of your books of business. Look at how your accounts would be catalogued by the DOL to understand the approach [regulators] are taking and exploring, and ask what your books of business will look like in a post-DOL world,” said David Bellaire, FSI’s general counsel.

Bellaire and his colleagues highlighted the changes likely to impact financial advisors and broker-dealers as the Obama Administration moves ahead to issue new fiduciary rules before the president leaves office. Broker-dealers and advisors would have eight months to implement them.

“The new Employee Retirement Income Security Act rules are very different from the Investment Adviser Act [of 1940] that you operate with daily,” Bellaire explained. Under ERISA, advisors would be prohibited from engaging in transactions that entail conflicts of interest for clients, unless there is an exemption; whereas under the ’40 Act, advisors and clients can reach an agreement regarding potential conflicts.

Overall, “DOL represents a fundamental rethinking on the way retirement advice is delivered,” he stated. “It means huge and sweeping change for the industry and enormous challenges for us all.”

The “sweeping changes” result from an expanded definition of fiduciary, which would cover the majority of interactions between advisors and retirement investors under the new rules. Advisors and clients would be required to sign Best Interest Contract Exemption contracts, in which broker-dealers and advisors acknowledge the new fiduciary standards and their impartial conduct codes.

The contracts are likely to include provisions that entail “extensive changes to compensation models,” since only “reasonable compensation” is allowed, according to Bellaire.

Information on exactly what and who gets paid via product sales will have to be published in detail on publicly available websites in a readable format, the FSI expert adds. And there must also be point-of-sale disclosures with one-, five- and 10-year cost projections for each product sold; in addition, annual reports on the products are mandatory.

“There is a limit on what assets can be in BICE accounts,” he explained, and alternative products like nontraded REITs are not permitted.

Contracts, Data

Advisors and broker-dealers will have to show quarterly returns for each and every retirement account and money movement, says Bellaire. “This is information that is not usually kept for IRAs and other accounts by broker-dealers. The requirements are very complex and entail significant changes in how broker-dealers do business.”

The contracts are likely to raise costs significantly for broker-dealers and expose them to further liability, he states. “DOL will put pressure on broker-dealer and advisor compensation models … and the result is reduced access to retirement advice products and services for small and midsize investors,” Bellaire said.

It’s also possible that commissions across product types — variable annuities, mutual funds and ETFs — could be the same, he notes.

Meanwhile a group of 46 Democrats has requested a second comment period on the new rules. “This is very significant, because the DOL has been resistant to opening things up for another comment period,” said Robert Lewis, head of legislative affairs for FSI. “For the industry, it would be good to have the opportunity to talk before the proposal is finalized.”

In late October, the House of Representatives passed Rep. Ann Wagner’s bill to stop the DOL from moving forward on the fiduciary rule. “We expect it to go to the Senate,” Lewis stated, “but the White House has issued a veto threat.”

FSI continues to reach out to members of Congress and their staff on the proposal. “This is the president’s number one domestic priority,” explained Lewis. The DOL has the authority to adopt the proposal, he adds, since it is in charge of ERISA. “And the DOL wants to get it out before the end of Obama’s term in office … they want to get this thing done.”

In addition to sharing the group’s deep concerns with both the timeline and process involved with moving the process along and implementing it, experts explained to conference attendees the “awkwardness involved” with the BICE contracts.

“You have to have the contract signed before you start the relationship with a client,” said Robin Traxler, associate general counsel for FSI. The contract also “subjects the advisor and the firm to increased liability surrounding recommendations, as well as with associated policies and procedures.”

Plus, with 13 asset classes allowed, the new rules “will limit products and the diversity you can offer,” Traxler says. “You only can offer products with reasonable compensation.”

On the flip side, “If you currently limit your business lines, this could put you conflict with the [new] rules and would raise the question: Are you offering the best offerings to client?” she said.

With the detailed disclosures required for investor costs, complex calculations will have to be made that include data from broker-dealers, product providers and others parties “to get it right,” Traxler explains.

Point-of-sale disclosures for a Class A mutual fund, for instance, “will be complicated and tough to create,” she says; by sharing the information with clients, “It will create a lot more questions” for the advisor.

Broker-dealers will be responsible for keeping websites publicly available with complete payout information for all advisors and for each product. “There will be both direct and indirect information for each asset sold in the past year available, too,” said Traxler, pointing to a slide that showed multiple columns and different types of data.

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