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Practice Management > Compensation and Fees

DOL Gave the Gift of Time. Use It Wisely

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What would you do if you knew exactly when an earthquake would change life the way you know it? What if you had the opportunity to prepare for it? Would you shore up your home to limit damage? Would you buy insurance? Would you sell insurance? Would you move to safe ground? Would you doubt the forecast and do nothing?

Jan. 1 is the date when the effects will be felt by financial advisors who work with retirement investors. The earthquake has already occurred. It occurred on June 9 when the Labor Department’s fiduciary rule became applicable. The shock of this earthquake has been delayed by regulators through a no-enforcement policy that remains in effect until Jan. 1.

Several things could change before the start of the enforcement period. If none of these changes occur, the transition period will end and enforcement will be in effect. Among the most likely changes are relaxed disclosure and contract requirements or a further delay in enforcement. The definition of who is a fiduciary, the best interest standard and compensation limits are very unlikely to change. The complete repeal of the rule is a remote possibility because such an action would require the courts to reverse themselves on a unanimous finding or even more remotely, for Congress to reach a consensus.

The no-enforcement policy creates an opportunity to pause and prepare for what lies ahead.

Those who choose to limit the damage must find ways of retaining as much of current compensation as possible. This requires adopting a method of compensation compliance that yields the minimum loss. Choices range from limits that are based on benchmarks (the worst) to profit-based compensation (the best).

Those who prefer to buy insurance protection will find that “earthquake” insurance is no longer available. There is simply no insurance protection for regulatory violations.

Those who decide sell insurance rather than investments may escape the earthquake by switching to products that are outside the reach of the new regulations. This severely limits business opportunities and is a distinct competitive disadvantage. The disadvantage becomes more acute as the public demand for fiduciaries continues to increase.

Moving to safer ground entails getting ahead of the regulations and avoiding all potential conflicts of interest. In practical terms this means selling advice as a service and charging a flat or hourly fee, so such a change would require considerable time to complete.

Those who doubt the forecast and maintain hope that the fiduciary change will go away may be right, but the chance of that occurring is diminishing as the roadblocks to the fiduciary standard are surmounted.

While these alternatives are still being considered, a growing number of firms are using the no-enforcement period to adopt a superior standard of care, thus rapidly making this the norm even before Jan. 1. This course is not without its hazards.

The principal hazard is that the no-enforcement policy includes a caveat that the policy applies only to those “who are working diligently and in good faith to comply with the fiduciary duty rule and exemptions.”

In other words, only those who can demonstrate that they are working diligently are guaranteed to escape enforcement action. Demonstration is effective only when there is visible evidence. It is doubtful that “thinking about it” will qualify as working diligently.

There are several low-cost actions that can clearly demonstrate working diligently, including:

  • Written analysis of exemption alternatives under consideration.
    The pros and cons of four alternatives are examined…
    (Fill BICE, Level Fee BICE, 408(g) Fee Leveling and 408(g) Computer Model)

  • Test of compensation for compliance with regulatory limits.
    Determining effect on compensation leads to a smarter course of action.

  • Fiduciary training taken.
    In addition to informing the decision about the best course of action, training is required to perform while complying with the fiduciary rules.

  • Review of practices that must be changed to comply with the selected exemption.
    Changes in practices lead to broader organization and compliance.

  • Client notifications of the fiduciary standard being adopted.
    The notifications are a public commitment to a course that is not easily reversed.

  • Written procedures to comply with the selected exemption.
    Procedures are changed only after the course of action is certain.

  • Templates to be used for discovery of client’s interests and recommendations.
    Revised templates, whether automated or manual, are required to support new procedures.

These activities and any others up to a full implementation of a fiduciary standard need to be well documented as though they are subject to a regulatory audit … indeed they might be!

The transitional period provides an opportunity to re-examine and if necessary, to change course with the knowledge of what others are doing and with the public response.


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