It’s now well settled that there has never been a greater challenge to financial advisors than the DOL’s expanded fiduciary regulation—it’s the most significant regulatory change in the 40 years since the passage of ERISA. It affects how advice is provided to every private sector 401(k) plan, every IRA and every rollover distribution to or from a plan or an IRA, making it the elephant in the room for every financial advisor serving clients today.
Under the new rule, providing advice one time—even just uttering the word ‘recommend’— will make you a fiduciary, even if the advice is not the primary basis for an investment decision. The client just needs to receive the advice, not act on it.
So recommending a rollover, for instance, would be considered fiduciary advice even if you are not recommending specific investments. What does all this mean? All financial advisors, at some point, will find themselves in situations where they are acting as a fiduciary. This is not business as usual.
But if you want to continue working, and you don’t want to have your recommendations limited by the fiduciary regulations, you may have a workaround. The new rule famously (or infamously, depending on your point of view) provides exemptive relief under the Best Interest Contract Exemption, or BICE. BICE gives you a means to disclose that you are accepting commissions and trails, that you are using proprietary products and other options.
But BICE is far from a ‘get out of jail free’ card. Even if you are a fee-only advisor there may well be instances where you need to contemplate whether the BICE is necessary for you.
Deploying BICE has a lot of devilish details that could trip you up. Here are a few:
1) BICE has no bearing on discretionary accounts.
There is no exemptive relief from the fiduciary rule if the advisor has discretion over the account. That clearly was and is prohibited and violates the prohibited transaction rules contained both in ERISA and the Internal Revenue code. BICE goes hand in hand with client approval.
2) Using BICE requires a financial institution to indicate that you are charging no more than reasonable compensation, and that you are not making any misleading statements about transactions, compensation, or other conflicts of interest.
So your first question might well become, what is the policy at the institution(s) you affiliate with? Then, what’s reasonable compensation? Who is the judge?
Of course a lot of firms are or will contemplate moving away from variable fee structures, different 12b-1s or finders’ fees on mutual funds and move to a level-fee platform. In this case, simplicity makes regulatory sense. Under BICE you can recommend an investment that pays you greater compensation than another, but it must be in your client’s best interest.