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How the DOL Fiduciary Rule Will (and Won’t) Affect RIAs

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In March, a prominent RIA chuckled when asked how he was preparing his wealth management firm for the Department of Labor’s redefinition of fiduciary under ERISA. “I’m sick of hearing about this rule,” he said, suggesting that the rule would not affect his firm at all.

That feeling is understandable, since RIAs already have a fiduciary duty to put their clients’ interests ahead of their own, while the burden of complying with the rule — released today — will mostly be borne by advisors and their broker-dealer partners.

However, he may be wrong. For example, while advisors are used to dealing with the Securities and Exchange Commission as their regulator and examiner, the DOL has a different enforcement scheme, though advisors who consult on retirement plans may already be familiar with the DOL and the complicated rules of the Employee Retirement Income Security Act. RIAs are used to disclosing conflicts of interest through their Form ADV filed with the SEC or the states, but “that will not suffice for the DOL rule, which is focused not on disclosing conflicts but on prohibiting them,” Schwab’s Michael Townsend said late last year.

Townsend, Schwab’s vice president of legislative and regulatory affairs, said then that “layering on another set of regulators will require someone in the firm to understand them to potentially monitor and comply with.” RIAs will have to consider, for example, “what kind of information … to provide to someone who is contemplating moving from a 401(k) to an IRA … someone who may not yet be a client of yours but may be considering become a client.” Can the advisor recommend a 401(k) rollover into an IRA when the advisor’s management fee for the IRA exceeds the 401(k) plan’s fee or when the IRA doesn’t perform as well as the 401(k)?

(Related: The ABCs of the DOL Fiduciary Rule)

In a Fidelity advisor survey released last month, 55% of RIAs surveyed said they expect the rule will increase the time they must spend on compliance. Tom Corra, COO of Fidelity Clearing & Custody, said in an interview then that “at a minimum,” advisors should expect to have “a conversation with clients” and increased recordkeeping costs. 

A preliminary assessment of the DOL rule suggests some of those compliance worries may not be as big an issue as first thought. Skip Schweiss, managing director for retirement plan services and advisor advocacy, listed several changes in the final rule of interest to RIAs.

He provides the caveat that “I have not yet read all of the 1,023 pages in the final regulations,” though he has “read the FAQs and the summary released last night” by the Department of Labor.

His first response is that DOL “retained the spirit of the rule — to raise the standards of care for retirement investors — but they also listened to a lot of the concerns that retirement advisors” and the industry had about the preliminary rule, which has been six years in the making. “They struck a really nice balance,” he said.

Those sentiments were echoed by several advisors. Harold Evensky of the wealth management firm Evensky Katz Foldes and Texas Tech University said in an email that the DOL rule constituted a “major step toward a more secure and dignified retirement for millions.” David Savir, a former JPMorgan wealth manager turned RIA just this year at Element Pointe Advisors in Miami, said in a note that ”the fiduciary rule is a very positive change for investors.”

Also, Schweiss pointed out that the implementation date for the new rule has been pushed back from this October to April 2017.

Schweiss also points out a benefit to investors. Since the DOL best interest standard is a “contractual obligation,” the rule “essentially takes mandatory arbitration out of these retirement accounts; investors’ rights are still retained.” Finally, Schweiss says his early reading suggests the DOL has constructed a fiduciary process that’s “more principles-based” than rules-based.

As for the benefits to advisors, particularly regarding the Best Interest Contract Exemption (BICE), he noted that “annual disclosures are gone, as are the 1-, 5- and 10-year projections” of the performance and costs of investment vehicles that the preliminary rule would have imposed. “They had to go,” he argues, since they were in conflict with Financial Industry Regulatory Authority rules.

In addition, he says that “some” of the BICE requirements “for RIAs were removed,” notably changing the timing of when a BIC must be presented to a client “from the point of initial conversation … back to it being part of the account-opening paperwork” process.

So will RIAs be affected? Schweiss said dually registered RIAs “will be impacted more than the fee-only RIAs.” Are RIAs ready for the rule? “My sense is they’re not — there was an [erroneous] idea that it only applied to brokers and insurance agents.”

With such a complicated rule, this is one instance where being a broker-dealer rep might make it easier to comply. “Broker-dealer reps have a home office preparing” for the DOL rule, he points out, mentioning steps already taken by LPL and Raymond James. Those broker-dealers probably feel some relief since it appears, Schweiss said, that “if you’re living under the Best Interest Contract, you can still recommend options, futures, forex and nontraded REITs.”

As for RIAs, Schweiss says that “If I were them, I’d be in touch with my securities lawyer or ERISA lawyer.”

— Check out more stories on ThinkAdvisor’s DOL Fiduciary Compliance page.