Other parts of this series:
We have been examining the various ways that financial services institutions (FSIs) can come into compliance with the U.S. Dept. of Labor’s new rule that expands their fiduciary duty to retirement account participants.
With the rule’s April 10, 2017, effective date just about seven months away and no way to anticipate how one of three federal courts will rule in lawsuits challenging the rule, FSIs already should be choosing the path they will take to comply. But there are many. And whichever one FSIs choose, they will need to change their business practices and in many cases how they compensate their representatives who directly advise and sell to clients.
Last time, we discussed operating as a fiduciary without any conflicts and opting to comply with the rule’s streamlined Best-Interest Contract Exemption (BICE) and full BICE—the latter of which allows investment advisors and annuity sellers to maintain their current structure of compensation and fees generated from parties other than clients.
Here are a few more alternatives:
- Rely, where possible, on the rule’s Principal Transaction Exemption (PTE) 84-24 to maintain your current compensation and fee structure. PTE 84-24 applies to advice and sales of securities, debt securities, unit investment trusts and certificates of deposit. Its requirements are less onerous than those required by BICE, but both exemptions require FSIs to comply with the rule’s Impartial Conduct Standards, which obligate advisors and annuity sellers to serve their clients’ best interests and charge reasonable fees. Controversially, however, in a last-minute change to its proposed fiduciary duty rule, the DOL in its final rule took this option away from sellers of fixed-indexed annuities. Those sellers now must comply with BICE to maintain their current compensation and fee structures.
- Opt for pre-existing transaction relief, an exemption designed to preserve existing compensation structures without requiring FSIs to disclose them as required under BICE and PTE. This relief period, which runs from the rule’s effective date to Jan. 1, 2018, ostensibly gives the industry time to comply with many client contract, disclosure and other BICE and PTE mandates. However, the DOL did not provide a transition period for implementing its Impartial Conduct Standards. Those standards will require the industry to change their business practices and how they compensate representatives who directly advise and sell to clients by the rule’s April 10, 2017, effective date. As a result, the pre-existing transaction relief option provides FSIs only limited benefits.
- Cease being a fiduciary and, for example, focus on taking orders without providing advice and offering education-only services. Of course, this option still would entail significant changes in business practices.