The new fiduciary standard mandated by the Department of Labor prohibits advisors from making recommendations that will cause compensation for their services to be more than “reasonable.”
This measure, part of the new fiduciary standard’s best interest contract exemption (or BICE), means advisors and others have to figure out how to best define reasonable compensation by April 10, 2017.
Some are likely to calculate an average or median compensation benchmark, according to Lou Harvey, CEO of the consulting and auditing firm Dalbar.
“This will inevitably lead to unlimited compression of compensation – death by benchmarking – for some parts of industry,” Harvey said in an interview with our sister site, ThinkAdvisor.
But there is another option – one that lets advisors used a cost-based strategy to earn their fees, which is what many lawyers, doctors and other professionals use. “This can insulate advisors from the fee compression,” he explained.
On Wednesday, Dalbar introduced the Profit-Based Pricing Model Calculator, which it says goes beyond “traditional assets under management pricing in which clients are charged an arbitrary basis point fee that is independent of the cost of servicing that client.”
Model in action
Instead, advisors can set fees for clients (and profits for themselves) based on the skills, costs, time, expense, overhead and risks of managing the portfolio.
“The calculator means you are leapfrogging over” benchmarks, according to Harvey.
Fee benchmarks under the new DOL rules haven’t emerged yet, he says. But they currently exist for the retirement plans regulated by the DOL’s 408(b)(2) requirement of 2012, which mandated that certain plan providers disclose compensation to fiduciaries.
Advisor who want to switch to a service-oriented pricing plan, Harvey says, would be moving in line with the new DOL rules.