In my last column, I addressed the DOL fiduciary rule transition period. In this column, I will address the post-transition period.
As a recap, during the transition period (June 9–Dec. 31), the compliance requirements under the rule are fairly straightforward. The advisor is required to:
Adhere to the Impartial Conduct Standards
Provide a written fiduciary acknowledgment
Designate a person responsible for addressing material conflicts of interest and monitoring advisors’ adherence to the Impartial Conduct Standards
As of Jan. 1, 2018, all bets are off. This is the date on which the rule and its much-ballyhooed Best Interest Contract Exemption (BICE) will go into full effect. However, the BICE will apply differently depending on whether or not an advisor is considered a level-fee fiduciary.
(Related: Judge Hammers DOL on Fiduciary Rule’s BICE)
A level fee is defined by the DOL as compensation based on “a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended, rather than a commission or other transaction-based fee.” Level fees do not include third-party payments, such as 12b-1 fees and revenue sharing payments.
For level-fee fiduciaries, the majority of the BICE requirements are satisfied through adherence to the transition period rules. The only additional obligation is a best interest analysis, which must be performed whenever the advisor recommends a rollover from an ERISA plan or IRA into an IRA that the advisor will manage for a fee. The obligations differ slightly depending on whether the assets are being rolled from an ERISA plan or an IRA.
For a rollover from an ERISA plan, the analysis must include:
Consideration of the retirement investor’s alternatives to a rollover, including leaving the money in his or her current employer’s plan, if permitted
Consideration of the fees and expenses associated with both the plan and the IRA
Whether the employer pays for some or all of the plan’s administrative expenses
The different levels of services and investments available under each option
For a rollover from an IRA, or in the case of a switch from a commission-based account to a level-fee arrangement, the advisor must simply document the reasons that the arrangement is considered to be in the best interest of the retirement investor, including the services that will be provided for the fee.
For non-level-fee fiduciaries, the compliance requirements are quite a bit more complex. As of the rule’s effective date, any advisor who is not a level-fee fiduciary is required to execute a best interest contract with each impacted client. For new clients, this can be done by incorporating the required terms into the firm’s existing advisory agreements or by creating a standalone best interest contract. For existing clients, this requirement can be met through a negative consent letter, which incorporates all required items, and states that the failure to terminate the amended contract within 30 days constitutes assent to the terms included therein.
Similar to the requirements during the transition period, a best interest contract must include both a fiduciary acknowledgment and an affirmative statement that the advisor will adhere to the Impartial Conduct Standards. In addition, the contract cannot include the following:
Exculpatory provisions that limit the liability of the advisor for a violation of the contract’s terms
A liquidated damages provision
A waiver or qualification as to the client’s right to bring or participate in an individual or class-action suit, except as provided in a pre-dispute arbitration clause; such arbitration clause cannot force the client to pursue the remedy in a venue that is distant or unreasonably impairs the client’s ability to assert a claim.
— Read The DOL Fiduciary Rule: Managing the Transition Period on ThinkAdvisor.