Fiduciary Rule: No Time To Waste in Prepping for Changes
February 18, 2016 by Kenneth Corbin
Even as a controversial fiduciary proposal is in the final stages of the regulatory process, many advisors aren’t bothering to reassess their compliance framework or lay the groundwork for the changes they will have to make in their practices when the Department of Labor’s rule becomes the law of the land.
That’s the assessment of Jason Roberts, CEO of the Pension Resource Institute and a partner at the Retirement Law Group, who urges advisors to begin assessing how their work with retirement plans and clients will be affected by the DoL’s rule, which would impose new fiduciary responsibilities on brokers and advisors working in that space.
“We’re hearing a whole lot of people saying, ‘Oh we’re just going to wait and see. We don’t want to take any action until we see the final rule,'” Roberts said during a webcast of a Practising Law Institute conference this week. “And what I would say is we’re pretty comfortable about 75% of what’s in the proposal will stick and will be almost republished verbatim, if you will.”
Roberts allows that some elements of the DoL’s rule could change from the first draft published last year. He is hopeful, for instance, that advisors will be able to present clients a sample asset allocation model based on their risk profile without triggering the fiduciary obligations. Under the initial proposal, offering that kind of basic investor education would require that advisors act as fiduciaries, marking a dramatic departure from the current regulatory framework.
“It’s not until you recommend specific securities under today’s rules that you cross that line,” he says.
‘THE NEXT ACA’
But the core provisions of the DoL’s framework are unlikely to change, which will pose advisors with a set of decisions to make regarding how to structure their practices in what Roberts sees as a seismic overhaul of the retirement advice space. He recalls a recent conversation with a colleague in Washington, who referred to the fiduciary proposal as “the next Affordable Care Act,” explaining that the changes to ERISA – the 1974 law which authorizes the Labor Department to regulate certain kinds of retirement advice – will likely come with years of advisory opinions and interpretive bulletins as firms struggle to comply with the new regulatory framework.
“It’s really going to be significant,” Roberts says. “And I know a lot of firms have deep resources internally on securities legal and regulatory matters. When we cross over then and apply those same skills or those same requirements to ERISA and the tax code, a lot of times those internal resources start to shrink.”
Under the proposed rule, advisors would still be able to offer conflicted advice — commission-based transactions, for instance — but to do so would have to enter a contractual agreement committing to act as fiduciaries and make recommendations in their clients’ best interest. Some advisors have suggested to Roberts — and others have said in government forums — that the provisions of the so-called best interest contract exemption are flatly unworkable and that they have no plans to incorporate it into their practices.
To take that approach, however, would be to shut the door to a vast market where clients are hungry for advice on some of the most basic aspects of planning for retirement, and Roberts suggests that advisors rethink their hardline approach.
“You are absolutely going to need this best interest contract exemption to do a rollover under this standard,” he says, urging advisors to begin the spadework of assessing how the rules, likely to be finalized later this year, will impact their practices. “We can look at impacted accounts, client types, do some inventory, identify potential migration strategies or mitigation strategies and, obviously, before we start implementing much of this we’ll want to go out and see what the final rule says.”
Ultimately, advisors at wirehouses and large regional B-Ds will defer to their firms on how they will have to change the way they do business.
As for independents, particularly dually-registered firms, Roberts sees the safest path to compliance in shifting rollovers to the advisory side of the business, and indeed suggests “quarantining” the brokerage wing of the practice, where conflicts of interest can appear more flagrant.
Advisors worried about the ramifications of the BIC exemption see as particularly ominous the provision granting aggrieved clients a private right of action, opening the door to litigation when an investment strategy recommended in good faith goes south. That raises the prospect that brokers will be “playing defense at every recommendation,” fearful that the next market dive will land them in a courtroom, Roberts says.
“Good advisors — good firms — get sued when the market tanks. So imagine now, in the quiver of this claimant or plaintiff is this contract that says you’re going to adhere to the highest fiduciary standard of care … and that at each recommendation you benefited by receiving additional compensation. I think that is unworkable — that scenario, that’s the brokerage scenario,” he says.
“What is workable is a robust advisory solution. It’s not going to be for all clients, and we’re going to have to find some workarounds for the others,” Roberts says.
“At the end of the day, what are we having to defend here?” he asks. “We’re having to defend that the recommendation … was in your best interest. What’s one of the best ways to get a client to articulate their interest so we know if it’s best? I would say financial plans, retirement income plans — something that is collaborative, that provides direction.”