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The October Surprise and the Campaign for BICE

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In October brokerage firms began “voting” in the other campaign – the campaign on the DOL rule. Through last week at least seven firms announced whether they would stick with commissions and service retirement accounts through the best interest contract exemption (BICE) or instead move to abandon commissions and offer “fee-based” retirement accounts.  

We are in the “BICE or not to BICE” campaign.

Merrill has led by rejecting commissions and the BICE, except for rollovers from commission to fee-based accounts. Morgan Stanley decided to keep commissions and accept the BICE, while still offering clients fee-based IRAs. Ameriprise, Raymond James, LPL and Edward Jones have generally followed Morgan Stanley. Only Commonwealth Financial followed Merrill.

Early reporting on the BICE campaign has been mostly firm-centric and about how firms are dealing with commissions in light of BICE requirements. One premise was expressed by Aite Group analyst Denise Valentine, who was quoted in one report as saying there’s no value “difference” between commissions and fees. “What the firms feel is appropriate for them.” She continues, “There is no right or wrong” between fees and commissions.

True, the law is neutral on compensation structures that firms may utilize. But does this mean the value proposition and quality of advice to retirement investors of all brokers and advisers under different compensation structures is also “neutral”? 

Further, irrespective the compensation structure, higher costs that cannot be justified – be they fees or commissions – will be deemed to “waste” client assets and be impermissible under BICE. This point should drive messaging in the BICE campaign explaining overcoming conflicts of interest and discussing what “best interest” means. Yet old habits die hard.

Morgan Stanley, with 16,000 brokers, has set out its vision of servicing retirement accounts under the DOL rule with clarity. “We believe our advisors can most effectively uphold a fiduciary standard of care and work in clients’ best interests by continuing to offer choice,” according to its co-heads of wealth management in the announcement. CEO James Gorman set the stage for this announcement a week earlier in the company’s quarterly earnings call, “Choice has been a fundamental guiding light for the firm and this is unlikely to change.”   

BDs’ announcements on BICE preceded the DOL FAQ released October 27. The FAQ provides guidance on, among other issues, BICE and BICE for level-fee fiduciaries. In 24 pages the DOL guidance sets out when BICE applies and what it means.

An overriding message: advisers and brokers need to exercise moderation and restraint to meet the “impartial conduct standards.” Integral to these standards is the prudent investor rule and the “duty to not waste” client assets in the selection of investment products. This principle, from the Restatement (Third) of Trusts, is hardly “news.” (Its 1996 articulation by John H. Langbein is a classic and found in “The Uniform Prudent Investor Act …” in the Iowa Law Review.)

In FAQ question 9, “Financial institutions must exercise care to avoid incentivizing to make investment recommendation that are not in the retirement investors best interest … they should carefully consider … the touchstone is always to avoid structures that misalign the financial incentives of the adviser with the incentives of the retirement investor.” In question 11, financial institutions must “adopt policies reasonably and prudently designed to ensure” that advisers meet the impartial conduct standards.

The FAQ question 13 sets out guidance on how level-fee fiduciary advice must be documented to justify rolling over assets from an ERISA plan to an IRA. The documentation must show “the reasons why the advice was considered to be in the best interest of the retirement investor.” Analysis should include the “alternatives to a rollover … and must take into account the fees and expenses of both the plan and the IRA … and the different levels of services available under each option.”

A key point deserves repeating. It deserves repeating because it appears to be incessantly misunderstood. Many critics say the DOL rule requires that investment recommendations be the lowest-cost option.


The requirement is that investment recommendations and their costs be in the retirement advisor’s best interest. The assumption is that costs matter.

So bring on higher-cost recommendations – and then explain why they are justified. With apologies to President Reagan, “Recommend but verify.”    

The campaign around fiduciary advice under the DOL rule is just beginning. Let’s hope it is more edifying than the other campaign that is, thankfully, finally ending.  


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