On Sept. 6, Boston-based DALBAR Inc., a financial services market research firm, released a briefing paper, “The Work Behind BICE Paperwork: What You Will Actually Have to Do” (available here).
The paper details how the Best Interest Contract Exemption (BICE) provisions within the DOL fiduciary rule create a significant challenge for financial institutions and advisors, and highlights the activities required to avoid compliance problems.
Increased Litigation Risk
In order to avoid prohibited transactions, BICE-adopters must “communicate commitments, promises and disclosures to qualify for relief,” the study notes. Those commitments and promises to do something — or to avoid doing something — are binding; consequently, BICE “clears the way for litigation for failure to do what is in the best interest contract.”
These conditions create risk exposures for institutions and advisors, says Louis Harvey, DLABAR’s president and CEO. He points out that under BICE, agreements and contracts must be enforceable. “What that means is that any judge in the country can find that there’s a breach of a contract,” he says. “It doesn’t require an ERISA specialist to find a breach of a contract.”
Harvey provides an illustration. The ideal way to serve the clients’ best interest would be to invest their funds in a guaranteed, inflation-adjusted, liquid, tax-favored, high-return investment, which, of course, doesn’t exist. That means advisors’ recommendations will inherently involve trade-offs that factor in multiple considerations about the clients’ finances, goals and risk tolerance. An advisor’s claim to acting in the client’s best interest now must be backed up by evidence of actions the advisor took to understand those considerations and support clients’ interests, says Harvey.
Advisors must be able to prove they followed through because it’s an enforceable contract, he emphasizes — it isn’t just a verbal generalization. “You have to put in writing for your client that you are going to act in their best interest and you are not going to benefit from it,” he says. “It’s a double-edged sword. It’s saying, ‘Listen, I’m going to act in your best interest’ and without evidence that you’ve done that, the client or their litigation attorney can certainly argue that you didn’t, especially if the results turn out to be unfavorable.”
Determining Reasonable Compensation
Under BICE, advisors and financial institutions must estimate the amount of direct and indirect compensation that results from their recommendations. It’s not just a matter of calculating sums, though — the DOL rule requires that advisors and financial institutions “receive no more than reasonable compensation (within the applicable ERISA and Code sections).”