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Final Thoughts on the DOL Rule--for Now

Whatever the ultimate fate of the fiduciary rule, the marketplace is heading toward level fee compensation and away from variable compensation.

W. Scott Simon, 04/06/2017

This month’s column will complete my analysis and discussion of the Conflict of Interest Rule (Rule) which was issued by the U.S. Department of Labor (DOL) on April 8, 2016.

It now looks as though the Rule’s applicability date of April 10 for implementation will “slip” to some later date [Ed. Mote: the implmentation ahs now been delayed by 60 days]. As noted in last month’s column, it’s likely that the Rule will remain in limbo for some period of time after which it will be left as is, modified in some way, or outright extinguished. Whatever the ultimate fate of the Rule, though, I think it’s important to finish this comprehensive examination of the Rule as it was set forth on April 8, 2016.

Transition Rules
There are certain transition rules for the various Best Interest Contracts (BIC), including a temporary relief period that excuses full compliance from April 10, 2017, to Jan. 1, 2018. These rules are designed to help financial institutions that will find it difficult to comply with a Full-Blown BIC/Disclosure BIC/BIC Lite by the deadline. (Only a Full-Blown BIC requires a formal written contract while the other BIC versions merely require assorted disclosures, representations and the like--although these are important and can be extensive.)

Certain BIC requirements, such as compliance policies and some disclosures, are waived for this transition period. Financial institutions must still (1) comply with the Impartial Conduct Standards, (2) acknowledge fiduciary status in writing, and (3) make certain other disclosures such as conflicts of interest. As of Jan. 1, 2018, though, all the BIC rules will go into full effect based on the original schedule.

IRA Rollovers
When providing services to a retirement plan, an advisor often develops relationships with the plan sponsor and plan participants. Some participants may turn to the advisor and seek advice, such as whether they should roll their assets out of the plan and/or what assets to roll over into the plan. Some advisors have exploited the trust they’ve created with participants by selling them high-cost investments in such situations. This may create a conflict of interest when an advisor’s fees charged for, say, rollover assets are higher than its fees charged for plan assets.

The Rule repeals DOL Advisory Opinion 2005-23A, the DOL’s former guidance on IRA rollovers. Instead, the Rule treats any rollover advice with respect to a plan or an IRA as fiduciary investment advice. Three kinds of rollover advice automatically are prohibited transactions (which can be circumvented through use of the Best Interest Contract Exemption (BICE)): (1) recommendations to a plan participant to take a distribution and roll it over into an IRA; (2) recommendations to an IRA owner to transfer its IRA to the advisor; and (3) recommendations to a participant or IRA owner to move from a transaction-based account to a fee-based account.

Impact on Fee-Based Advisors
The Rule will affect substantially all advisors because of its reach to IRA assets. This includes fee-based advisors offering IRA rollover advice. RIAs that are level fee fiduciaries might need to go the BIC Lite route in order to provide conflict-free IRA rollover advice since, as noted, compensation associated with an IRA is likely to be greater than compensation derived from a plan. The BIC Lite may also be relied on by an advisor when it offers rollover advice to investors with whom it has no pre-existing relationship--so-called “off the street” investors.

Impact on Commissioned-Based Advisors
The Rule, as noted, will affect substantially all advisors because of its reach to IRA assets. This too will include commissioned-based advisors offering IRA rollover advice.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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