It’s getting to be crunch time for advisors to ensure compliance with the Department of Labor’s fiduciary rule. By April 10, 2017, advisory firms must adhere to what the DOL describes as “impartial conduct standards,” acting in the best interests of the client.
They’ll need to notify all retirement investors of their fiduciary status, describe any material conflicts of interest, and designate someone to be responsible for addressing material conflicts of interest and monitoring adherence to the new rule. Exemptions from best interest standards will be available through the use of the Best interest Contract Exemption (BICE) or principal transaction exemptions, and can be phased in up until Jan. 1, 2018, when full compliance is required.
Matt Matrisian, senior vice president of Strategic Initiatives at AssetMark, which provides investment, relationship and practice management solutions for advisors, has developed a list of questions for advisors to see how prepared they actually are for the new rule:
Are you still unclear about the details of the final DOL rule and the responsibilities of becoming a fiduciary?
Is the majority of your book of business in retirement assets?
Are the majority of the products you offer commission-based?
Are you receiving any non-level compensation?
Are you still waiting to speak to your clients about the rule?
Have you segmented your book of business?
Are you lacking a formalized compliance and documentation process to comply with the final rule?
Are the majority of your commission-based assets in products that would require a surrender charge or are difficult to transition?
Are the majority of your commission-based mutual funds in direct business that is difficult to supervise under the fiduciary standard?
If an advisor answers “yes” to five or more of these questions, he or she should “begin preparing immediately,” according to Matrisian.
Matrisian suggested a few places advisors can start:
1. Segment Clients and Revenue Streams
The key question to answer here is whether a commission-based client has enough assets for the advisor to move that client to a fee-based structure, which Matrisian said can be good for business.
Not only does such a structure increase fees as assets grow, but “there’s less regulatory onus and a better business model with recurring revenue and higher valuations as a result,” said Matrisian. “It’s important for advisors to move to fee-based relationships when appropriate.”
2. Switch Investments to Lower-Cost Equivalents
Matrisian recommends that advisors move client accounts away from higher-fee mutual funds, such as A, B or C shares, which have loads or trailing fees, to cheaper institutional shares (which have larger minimums but lower expenses) when possible, and from commission-based annuities to fee-based annuities.
“Usually what we see in a lot of advisors’ businesses is one or two commission situations, including annuities,” said Matrisian. He expects more product managers will be consolidating the number of funds and other products and introducing lower-fee products as a result of the DOL rule.
In addition, advisors may be able to aggregate enough client assets to meet the minimum requirements for institutional classes of funds.
Edward Jones, for example, will no longer be selling retirement savers mutual funds outside of an advisory account, which will carry an annual fee, and it is lowering the minimum for those advisory accounts.
3. Focus on Your Value Proposition
The shift away from higher-cost commission-based products to a fee-based relationship will be a challenge for a large number of advisors who will then have to differentiate themselves in the marketplace beyond any investment prowess, said Matrisian.
“Such a large segment [of advisors] were product-oriented brokers who hung their hat on their investment management expertise,” said Matrisian. “But that is becoming more and more of a commodity, so advisors will have to make that shift to define and change their value proposition.”