Last week, we discussed how little time is left for financial services institutions (FSIs) until the U.S. Dept. of Labor’s new rule expanding their fiduciary duty to retirement investment clients takes effect. One of three federal courts hearing challenges to the rule could delay the rule’s April 10, 2017, effective date, but there is no way of gauging whether a court will grant such relief.

The prudent course of action for FSIs is anticipating that the rule will take effect, expanding the list of those who owe a fiduciary duty to retirement investment clients. The rule also mandates how advisors and annuity sellers must disclose all transactions considered a conflict of interest—additional commissions, fees and expenses related to their client services—to earn a conflict-of interest exemption for those transactions.

That leaves FSIs with a fundamental question: How do they respond and come into compliance with the new rule? There are multiple options, each with some merits as well as disadvantages. In this post, let’s examine three:

  • Forget the exemptions. Operate as a fiduciary without any conflicts by avoiding all prohibited transactions. You would not have to comply with the DOL’s complex exemption rules, but you would have to reinvent your sales and distribution system–a costly and time-consuming proposition.
  • Operating as a fiduciary without any conflicts still could require you to comply with the rule’s streamlined Best Interest Contract Exemption (BICE). That would be necessary for firms that recommend clients move from a commission to a fee-based account or roll over an account. Under the streamlined BICE, the DOL explains, firms “must provide a written statement of fiduciary status, adhere to standards of fiduciary conduct, and prepare a written documentation of the reasons for the recommendation.”
  • Maintain the transactions the DOL considers a conflict of interest and comply with BICE. Under this exemption, advisors and annuity sellers must painstakingly document these transactions for clients and contractually warrant to Individual Retirement Account clients that the advisors and sellers will operate according to DOL-prescribed Impartial Conduct Standards. Advisors and seller also would have to provide clients any other information they request about the transactions. While FSIs would be able to retain their existing forms of compensation for representative interacting with clients, firms must be careful that variabilities in that compensation are attributable to “neutral factors.”

Next time: Three more options.

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