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What Advisors May Not Know About the DOL Fiduciary Rule

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The DOL’s fiduciary rule may be the biggest regulatory change in the financial services business since the mid-1970s when brokers’ commissions were deregulated and IRAs were created. On April 10, the first of two effective dates for phasing in the rule, all broker-dealers, registered reps and insurance company agents earning commission-based compensation for work with retirement plans or IRAs will be deemed fiduciaries, which will require them to act in the best interest of their clients. Even RIAs, who are already fiduciaries, will be affected by the rule change.

The rule is long – running over 1,000 pages – and complicated, but “doable” for financial advisors, says Marcia Wagner, managing director of the Wagner Law Group, a Boston law firm specializing in employee benefits and pension law. “There’s been a lot of panic about the rule,” she says, “but when you break it down into its parts it’s doable. If you look at the whole thing, it’s overwhelming.”

Wagner, who’s also co-author of the book “The Advisor’s Guide to the DOL Fiduciary Rule,”  led a ThinkAdvisor-sponsored webinar this week, “The New Fiduciary Rules: What Do You Need to Know and Do Now,” which focused not just on the basics of the rule but also on many details, some of which may surprise you. Here are some of the highlights of that webinar.

Defining a Fiduciary

The DOL rule expands the definition of a fiduciary. A fiduciary will no longer be defined as someone who makes investment recommendations on a regular basis, with the mutual understanding of the parties involved, that serve as the basis for an investment decision and are individualized to the particular plan’s needs – all included in the definition of a fiduciary under current law.

Under the new DOL rule, providing advice one-time only, rather than regularly, would make an advisor a fiduciary, and there is no need for a mutual understanding of the parties involved. Also, the advice doesn’t have to be the primary basis for an investment decision or individualized. The client “merely needs to receive the advice, not act on it,” says Wagner. “Merely recommending a rollover will be considered fiduciary advice even if it there’s no recommendation about how to invest it.”

In addition, according to Wagner, if an advisor says that he or she is a fiduciary – even they wouldn’t qualify otherwise – the advisor is deemed a fiduciary, subject to the new rule. “If you say you’re a fiduciary, you are a fiduciary under the fiduciary rule even if you’re not.” Wagner calls this the “loose lips sink ships requirement.”


Since the new rule widens the definition of a fiduciary, it applies to advisors who never considered themselves fiduciaries before, including those who sell commission-based products for retirement accounts. But under the Employee Retirement Income Security Act, which sets minimum standards for defined benefit and defined contribution retirement plans, and the IRS code, which oversees IRAs, a fiduciary  advisor would be prohibited from earning commissions on investments for those accounts because that would not be considered to be acting in the best interest of the client.

The new rule provides exemptive relief to that prohibition via a Best Interest Contract Exemption, aka BIC or BICE, if the client approves of those product purchases for their account. There is no exemptive relief from the fiduciary rule by way of a BIC if the advisor has discretion over a client’s accountand can invest account funds in commission-based products without the approval of the client.

The Four Types of BICs

There are four types of BICs that advisory firms can use between April 10, 2017, and Jan. 1, 2018, when the rule will become fully effective: Full-Blown, Disclosure, Streamlined and Transition, according to Wagner’s nomenclature.

Without going into all the details – and the devil surely seems to be in the details –  here are some BIC basics:

All BICs except the streamlined BIC cover advisors who receive variable compensation from any of the products they sell to clients, such as variable annuities. The streamlined BIC covers fee-based advisors only and is required when advisors recommend that the client roll over their employer-based retirement fund like a 401(k) into a rollover IRA or when the advisor recommends that a client transition from commission-based payments to a fee-based arrangement. The Transition BIC can be used only until Jan. 1, 2018, when the rule take full effect. Advisors selling commissioned products to retirement accounts would need the full BIC for IRA and non-ERISA accounts and Disclosure BIC for ERISA accounts.

The financial institution using the BIC would need to note that the advice was in the best of the client, charges no more than reasonable compensation, and makes no misleading statements about transactions, compensation or other conflicts of interest.

Reasonable Compensation

“Reasonable” generally means not considered excessive according to the market value and nature of the particular service or benefit, but Wagner noted that this doesn’t mean the DOL will “condone all customary agreements” currently in effect.

The best protection against “unreasonable,” said Wagner, is for advisors to “document the process that’s used to determine what is reasonable, including benchmark, frequency of meetings with clients or frequency of advice dispensed online or in person.”

In addition, said Wagner, choosing the lowest price investment option won’t necessary be in compliance with the new rule because that may not be in the best interest of a client. More expensive options may be better for a client, but you have to “document, document, document the rationale for your advice.”

For example, an advisor could recommend a variable annuity for an ERISA plan and collect the commission earned through the sale if more time and expertise were needed for the sale, but the advisor could not collect different payouts for different sales of the same type of annuity. As a result, said Wagner, it’s expected that the fiduciary rule will change the payout grid for registered reps.

Fee Levelization

This fee levelization can be used instead of a BIC for advisor sales of investments that earn them commissions, according to Wagner. She expects more firms will consider using level commissions as well as flat-dollar revenue sharing payments in order to comply with the DOL fiduciary rule.

Managed accounts, which typically include discretionary investment advice and therefore could not qualify for exemptive relief using a BIC, could use fee levelization for commission-based products and BICs for programs featuring nondiscretionary advice, according to Wagner.


Under the DOL rule, advisors can continue to receive ongoing commissions from investment products recommended before April 10, so long as the sale was in compliance with prohibited transaction rules in effect at the time of the sale and the compensation was reasonable. But if the advisor recommends additional purchases of the same product for a retirement plan on April 10 or thereafter, a BIC would be required. Those purchases are not grandfathered. Arbitration Has Its Limits

Financial advisory firms may still use mandatory arbitration for disputes with clients, but clients will not be limited to that recourse. Under the DOL rule, they can also pursue their case in court as part of a class-action suit.

“That’s a huge change,” said Wagner. “In the past arbitration was it. It ended the issue. Clients can participate in class-action suits regardless. Look at all the class-action lawsuits with employees,” noted Wagner, referring to the proliferation of lawsuits primarily against 401(k) and 403(b) plan sponsors. “You could see something similar gravitating through the RIA, broker-dealer and wirehouse world.”

What Advisors and Firms Should do Now

The DOL fiduciary rule begins to take effect in less than eight months, which doesn’t give firms that much time to prepare for all its complexities. “It’s in a firm’s best interest to go full speed ahead in order to comply with these new rules,” said Wagner, adding that it would be foolish for firms to wait for the adjudication of three pending lawsuits. “I wouldn’t want to wait and hope for a ruling to go a certain way and not be appealed,” said the employee benefits attorney. 

“Figure out what it is, how you’re going to comply and then comply. Do the best you possibly can,” said Wagner.

She also recommends that firms identify all the products and services they have sold to retirement plans and IRA accounts along with all instances of variable compensation, confirm they have adequate surpevisory control and develop strategies to comply with the rule.

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