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Practice Management > Compensation and Fees

The BICE Is Not a DOL Fiduciary Get-Out-of-Jail-Free Card

By Mark B. Klein

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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.

The real protection, for your business growth as well as for regulatory compliance, is to document the process you’ve used to determine what’s reasonable. That includes benchmarking information in order to evaluate the reasonableness of the compensation in light of the value (services) you provide to your clients. How are you fulfilling those responsibilities? Are your fees fair relative to others in the industry? The resulting process-driven documents will demonstrate your value to clients as well as to examiners.

3) BICE won’t get you out of full fee disclosure.
BICE requires you to affirm your client’s right to complete fee information, provide access to your compensation and indicate any material conflicts. It mandates all of these, and disclosures are to be carefully considered by you and your firm. Some clients will sign BICE and never look at any details, but others will find your fee disclosure, even if it’s buried on your website, and scrutinize. Just know it.

4) Compliance professionals are your new best friends.
A lot of guidance for DOL regulations has yet to be written. There’s already plenty. Make sure you have a great compliance team watching your back, and consult with them early and often. (See Phyllis Borzi story)

5) You will need to keep better records than ever.
If you have wondered what to do with your CRM system beyond noting birthdays and anniversaries, you’re in luck: this is really how these systems should be used going forward. Use your CRM copiously to prove that the services you’ve been contracted to provide are, in fact, being delivered. Note when you send each annual review and quarterly statement. Log the results of every client meeting.

You can also create success metrics to prove your value.

For example, if you advise retirement plans, at enrollment meetings you may want to provide reports that show participant engagement, such as improving contributions or rising deferral percentages. You can show diversification rates, matching-fund participation, and more. Our firm makes it easy for you to generate these sorts of reports, which will show your value and the value of your firm, and support your fees as reasonable. 

Compliance experts are unanimous in recommending meticulous records of your activities once the DOL rule is enforced. There is a famous line in a court opinion interpreting ERISA: “a pure heart and an empty head are not enough.” In other words, ignorance of the law is no excuse. These requirements do apply and as an advisor, you need to understand that.

But keep in mind that, like all regulatory changes, this one is far from the end of the world. Fighting the tide is much harder and less satisfying than surfing the wave.

In fact, if you adjust rapidly, you may find yourself at a competitive advantage.

Advisors will find many firms ready to help them adjust to the new regulatory regime, and they may find that serving their clients in a fiduciary manner, with level and reasonable fees, thoughtful advice and plentiful disclosure of potential conflicts, is well worth the effort.

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