While the nuances of the new rule and its practical impact to the financial advisory community will be addressed at length at Loring Ward’s National Education Conference at the end of this month, here are five initial points to keep in mind:
- It will be much more difficult for a registered investment adviser or broker-dealer to avoid being a fiduciary to an ERISA plan or IRA. The “test” for what triggers fiduciary status has been simplified and streamlined, making it much easier to trigger.
- Just because a registered investment adviser is already a fiduciary under the Investment Advisers Act of 1940 does not mean he or she is automatically a fiduciary under ERISA. The new definition of fiduciary under ERISA has its own definition and set of implications, even for fee-only advisors.
- Conflicts of interest that may be permitted and disclosed in an advisor’s ADV may be considered to be a prohibited transaction under ERISA and correlated IRS rules. Not all conflicts can be disclosed away, and prohibited transactions need a prohibited transaction exemption in order to exist.
- Advisors will need to closely scrutinize their conflicts of interest, particularly those in which they are receiving some sort of compensation from a third party like a product sponsor, custodian, or other third-party service provider. The advice an advisor gives cannot affect his or her compensation, which is especially pertinent if an advisor recommends that a client roll-over a 401(k) account to an IRA account upon which the advisor can collect a fee.
- There’s a new prohibited transaction exemption in town, and its name is BICE (Best Interest Contract Exemption). BICE also has a close relative, and its name is BICE-lite or Level-Fee-BICE. Both versions of BICE will likely be used extensively by the industry, and the former is a means by which advisors (particular those associated with a broker-dealer) can continue to receive conflicted compensation that would otherwise trigger a prohibited transaction. Beware, however, that complying with BICE is no cake walk, and requires a host of additional documentation, disclosure and policies.
The DOL is expected to release FAQs and further guidance by the end of the year, so hopefully there will be further clarity about how we can all collectively prepare.