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Advisors Find Fault in Fiduciary Rule Guidance

By Murray Coleman November 9, 2016

The Department of Labor is promising more answers to advisors’ questions about how to implement its new rule aimed at raising fiduciary standards for retirement planning.

Late last month, the DOL rolled out its first set of clarifications on the new rule in a “frequently asked questions” format.

But even with at least two more rounds of FAQs reportedly to come from the regulator in its attempt to help FAs understand the new rule, many experts believe the DOL is facing an uphill climb to get the brokerage industry ready for early implementation in April.

“Going forward, the DOL certainly has a lot of questions that need to be addressed,” says Natalie Wolfsen, chief commercialization officer at investment outsourcer AssetMark.

The 34 answers initially offered in last month’s FAQ focus on the best interest contract exemption. That so-called BICE provision allows brokers to sell some commission-based products if they sign a “best interest” agreement with a client first.

The initial FAQ was helpful, Wolfsen says, but it still leaves “a big gap” in terms of specifying exactly how advisors can make sure they’re following the letter of the law. In several areas, she adds, “their clarifications only raise more questions.”

The rule will take effect on April 10, but full implementation of the BICE portion isn’t scheduled to become mandatory until early 2018.

While the DOL is taking an FAQ approach to its guidance materials, “that’s not how compliance is actually implemented,” notes David Lyon, chief executive at Oranj, a Chicago-based software developer focused on wealth management.

“Now that a new rule is being presented to the industry, it’s still not very clear how it practically can be interpreted,” says the ex-advisor turned technology expert. “The FAQs are creating more confusion, not less, for advisors trying to work with clients on a holistic basis.”

Natalie Wolfsen

For instance, in FAQ question 11 – which asks if the full BIC Exemption prohibits a FA from discounting prices paid by customers for services – Lyon notes advisors are told that in order to properly comply with the BICE, they need to “adopt policies and procedures reasonably and prudently designed to ensure that individual advisors adhere to the exemption’s impartial conduct standards.” But what is considered reasonable and prudent, he says, can be “highly interpretive.”

“It’s well-intentioned that the DOL is offering some glimpse into how advisors and institutions can come up with policies to deal with the BICE,” Lyon says. “But the only way they’re really going to know is when an examiner walks into the room.”

AssetMark’s Wolfsen has identified at least one problematic area in the FAQ; the DOL’s response to question 12, which asks if the payment of FA recruitment bonuses is permissible under the full BIC Exemption – and whether it matters if the bonus is contingent on the achievement of one or more sales targets.

Firms are told that asset-based “back-end” recruitment bonuses create issues. Yet at the same time, the DOL’s guidance in another part of the FAQ (question nine) explains that ongoing compensation methods based on assets might also prove troublesome. “Does this apply to question 12, which also discusses asset and/or revenue-based payments?” Wolfsen asks.

Wolfsen is hearing concern that the DOL’s FAQ seems to be treating back-end bonuses in too generic of a manner – that is, whether such pay is tied to profit, revenue or asset level targets. “The issue is that in other portions of the FAQ they indicate that gradual payments paid over time might be okay,” she says. “But in this instance, the DOL seems to be explicitly talking only about broker-dealer relationships.”

Subsequent FAQ offerings from the DOL need to address more than just how advisors determine fee schedules when rolling over client assets to IRAs, says Bonnie Treichel, an attorney and chief compliance officer for independent RIA Multnomah Group in Portland, Ore., which manages about $14 billion.

The initial set of answers did a good job of explaining data sources FAs can seek out to compare different investment costs for clients using different products, she adds. But the current FAQ comes up short in explaining other key pieces of information that advisors can use to conform with the BICE, according to Treichel.

“Clients might be able to get a different level of service or a different set of features in an IRA that isn’t in their existing retirement plan,” she says. “So it’s not always going to be an apples-to-oranges type of statistical comparison.”

In that regard, Treichel finds that question 14 – which deals with level fee provisions – is too narrowly written. “It needs to be more expansive in terms of telling advisors how to document more intangible types of information – items that go beyond simple fee disclosure,” she says.

Late last month, Phyllis Borzi, head of the DOL’s Employee Benefits Security Administration, said advisors could expect more FAQs before the end of the year.