Now that the Department of Labor has finally published its fiduciary rule, it is time for advisors and firms to consider how their lives will change.
Take compensation, for example. Plenty of accusations and hypothetical situations were bandied about during the past year since the DOL released its tentative fiduciary rule.
Now that the rule is published, we have a finished product from which to clear up a few misconceptions regarding compensation. Here are the most common questions regarding comepnsation:
- Do you have to recommend the investment that is the lowest cost or generates the lowest fees? No. The rule clearly states that lowest cost/fees are not the sole criteria. The rule allows, with full disclosures, room for advisors to factor in things such as risk tolerance as well, said James F. Jorden, a shareholder of Carlton Fields Jorden Burt.
- Does the rule eliminate some, or all, commissions? No. Many commissions, including trail fees, revenue sharing, and other incentives, fall into the category of “conflicted compensation.”As such, advisors will need to comply with one of the prohibited transaction exemptions to continue to receive commissions. If they do so, and disclose the fees, they can be received, said Jamie Hopkins, co-director of the New York Life Center for Retirement Income at The American College. However, “there’s a general feeling here that some of that stuff might have to go away,” he added. “From a liability standpoint, you might see people move away from those indirect compensation or revenue sharing or bonus models."
- Does securing a Best Interest Contract Exemption get you out of being a fiduciary? No. In fact, part of complying with the BIC is acting as a fiduciary. “It’s just allowing you to get paid in a certain way while acting in the best interest of your client,” Hopkins said.
- Will your existing compensation structures comply with the rule? Yes. The rule contains a grandfathering clause that will allow existing commission arrangements to remain in place after the April 2017 compliance deadline.
In addition, the DOL will permit a recommendation to roll over from a plan or IRA to a level fee arrangement or to switch from a commission to a level fee arrangement. Advisors will need to provide documentation that the move is in the customer's best interest.
This leeway may help advisors who earn their living from commissions instead of fees stay in business, Hopkins said.
One of the most important words in the DOL rule is “reasonable,” in the context that all compensation must be reasonable. Unfortunately, it will be some time before a reasonable standard is known, Hopkins said.
“’Reasonable’ in this case is really going to be determined by the courts,” he said.
The vast majority of advisors will stay in the business, adapt to the new rules, Hopkins said, and carve out a good living. The money is in retirement accounts, so the opportunity for a livelihood remains.
“You can’t leave where the money is,” he said.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].
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