DOL Rule Sets Up Compensation Minefield

The Department of Labor fiduciary rule was published nearly four months ago, but analysts say broker-dealers and their advisors still don’t fully understand how compensation is affected.

The rule requires anyone working with retirement funds to act in the best interest of their clients. That means “conflicted” compensation, like trail commissions and trips to Cancun, are out.

However, the DOL included a series of exemptions permitting advisors to continue accepting such compensation if they meet certain disclosures and the recommended investment product is still in the best interest of the client. Specifically, the Best Interest Contract exemption theoretically allows advisors to continue selling variable and fixed-indexed annuities on a commission basis.

But it isn’t quite that easy to put those words into practice and be in compliance, said Bradford P. Campbell, counsel at Drinker Biddle & Reath in Washington.

“I think what people read into that is ‘Okay, well maybe we can still operate largely as we have been but we’re just going to have to jump through additional hoops to do so,’” he said. “That’s not the case. The BIC exemption does not preserve the status quo with additional conditions.”

Critics say the DOL is trying to force the industry to move from a commission- to a fee-based model with its 1,023-page rule. Opponents filed three lawsuits, the first of which will be heard Aug. 25 in District of Columbia District Court.

“We’ll probably have some sort of court ruling, at least on that initial set of motions, probably in September," Campbell said. "Throughout the fall, we’ll probably be learning more about where the litigation is going."

Two Ways to Set Compensation

Broker-dealers have two options for advisor compensation under the BIC, said Fred Reish, a partner with Drinker Biddle, calling it “the single most disruptive change” under the BIC. They can opt for level fee, or set a compensation structure based on “neutral factors.”

The latter option will permit more freedom, but carries the potential for a class-action lawsuit against the broker-dealer if compensation isn’t done right, Reish said.

He recommended BDs hire a third-party consultant to do an analysis of service factors and create a fee structure based on those neutral factors. The fee structure would apply to all products sold within a category.

There’s still risk in creating those compensation grids, Campbell said, even if done with an outside consultant.

“Your expert says that it should be two times the compensation for an annuity as it is for an index fund or a mutual fund because there’s more work,” he said, citing a hypothetical case. “The plaintiff is going to have an expert that says ‘Well that’s great but it really was 1.2 times. Let’s sue about it and find out who was right.’”

While the broker-dealer is allowed to accept variable compensation, the advisor must be agnostic with regards to products sold within a category, Reish said.

Both Campbell and Reish, are working with clients struggling to get into compliance with the fiduciary rule.

Those clients are not waiting. The initial fiduciary rule mandates take effect April 10, 2017, with the remainder of the rule effective Jan. 1, 2018.

“They don’t even have enough time under the current timeframe to get into compliance by April 10,” Reish said. “Therefore, they can’t wait to see what the outcome of the litigation or any of these other eventualities might be.”

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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