After six years of proposals and over 40 years since an actual change, the Department of Labor’s new fiduciary rule is finally here. While we work to schedule a more in-depth webinar on the 1,000-page regulation, here are some key elements to digest.

The rule’s structure consists of three core concepts:

    1. Expanding the definition of who is a fiduciary: any individual receiving compensation for making investment recommendations that are individualized or specifically directed to a particular plan sponsor running a retirement plan, plan participant, or IRA owner
    2. Absent an exemption, you cannot cause yourself to receive conflicted compensation based on recommendations
    3. Conflicted compensation needs to comply with the Best Interest Contract Exemption (BICE) — disclosing fiduciary status, conflicts, impartial conduct standards, reflecting prudence and care without regard to the financial interest of the advisor.

    When does this go into effect?

    April 10, 2017, the broader definition of fiduciary will take effect. Firms that take advantage of BICE will be required to comply with a subset of conditions by that date:

    • Acknowledging their fiduciary status
    • Adhering to the best interest standard
    • Making basic disclosures of conflicts of interest

    January 1, 2018: All other requirements of BICE go into full effect.

    What constitutes advice or a recommendation?
    Advice involves a call to action specific to the recipient and takes into consideration context, content and presentation giving rise to fiduciary accountability. Recommendation is defined as a communication that a person would reasonably view as a suggestion to take a particular course of action (advice = fiduciary).

    What is “levelized compensation”?
    Here you receive the same compensation regardless of the recommendation, such as flat dollar fees or asset-based pricing on total assets under management. Note, levelized compensation translates through to affiliates (i.e., BDs) and the Department of Labor is requiring firms to mitigate any conflicts of interest.

    When is BICE applicable?
    Under the rule, being a fiduciary means that an advisor must provide impartial advice in the clients’ best interest. The advisor cannot accept any payments creating conflicts of interest unless the advisor qualifies for an exemption intended to ensure that the customer’s interests are protected. This is where BICE may apply.

    Who is responsible for preparation of a BICE Agreement?
    The broker/dealer or RIA firm is responsible.

    How is education impacted?
    Certain types of education — such as providing descriptions of investments or options without specific recommendations — fall under “non-fiduciary communications” and are therefore not considered fiduciary acts. An example would be to educate on distribution options from a retirement plan upon termination (leave your money in the plan, roll over to an IRA, roll over to the new employer’s 401(k) plan, cash out) with no mention of an actual recommendation.

    What about annuities?
    Both variable annuities and fixed index annuities are covered under BICE.

    If I am working with a new client to roll over an IRA and am an asset-based fee advisor, are there any conflicts?
    Indeed there are because this is a new IRA client and you transition from not being paid to recommending something that pays you. As such, a contract will be required.

    What can you do now?

    1. Review your book of business to see how many IRAs and retirement plans your firm manages
    2. Review the compensation structures
    3. Understand if conflicts of interest are present
    4. If applicable, talk with your broker/dealer
    5. Embrace being a fiduciary

    Stay tuned for more information!

    This blog is intended as a general discussion on the subject matter and is not intended to be a complete discussion of ERISA or fiduciary duties under ERISA. Do not rely on this section for legal advice. Each ERISA fiduciary issue has its own unique set of facts and circumstances demanding specific attention. Seek the advice of competent ERISA legal counsel on any questions concerning ERISA duties.