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Fear Looms DOL Rule Will Kill Centers of Influence Deals

By Murray Coleman September 25, 2017

Rising costs and billowing paperwork are two issues commonly brought up by critics of the Department of Labor’s new fiduciary rule for retirement planning. But practice management experts are also warning that advisors might find monetizing their professional referral networks more difficult in the future.

Despite being pushed back to mid-2019, full implementation of the DOL rule is still likely to drive compliance costs “too high” and create regulatory hurdles that will make generating revenue from outside referral networks “too risky,” says Ryan Walter, a regulatory attorney at Stark & Stark in Princeton, N.J.

At issue is the DOL rule’s best interest contract exemption. The BICE mandates that FAs clarify in writing compensation details about fee structures and costs, among other things. It’s a controversial provision some legal analysts are predicting will be heavily revised.

Even so, partial implementation of the DOL rule began in June and advisors are left to sift through rule basics to determine potential effects.

An area of increasing focus in the BICE, Walter argues, is its impact on working with centers of influence like lawyers and CPAs. Developing contacts with such professionals is a common practice among advisors, he notes. “In some cases more well-established external networks can become sources to produce additional revenue on the margin,” Walter says.

The problem with trying to make money off referrals passed along to others in a professional network, he suggests, is figuring out if a firm is acting as a “level-fee” fiduciary or not. In general, the securities lawyer figures advisors will be considered as falling into such a category “if their compensation basically remains the same no matter what type of advice is given.”

The advantage to being considered as a level-fee fiduciary in retirement planning, he adds, is that “your compliance burden is going to be significantly lower.”

Accepting money from outside networks for referrals, Walter warns, is likely to be interpreted by regulators as negating an advisor’s ability to act as a level-fee fiduciary. “The choice is going to be between having a lot more paperwork – mainly through being forced to create BICE contracts – and remaining less scrutinized by not taking payments,” Walter says.

If advisors intend to work as non-level fee fiduciaries in retirement accounts, they’ll be required to notify the DOL of their intent to rely on the BICE. “That’s just going to raise a firm’s regulatory risk profile because they’re basically alerting authorities they’ve got arrangements that might be creating conflicts of interest,” Walter says.

He’s recommending advisors dampen their expectations about how easy it’ll be to get a cut of any fees earned on referrals to outside professionals.

Ryan Walter

“As it stands now, this pretty much is going to wind up killing most opportunities for advisors to keep creating new revenue streams when they refer clients to outside professionals,” Walter says, “and still be able to avoid entering into BICE agreements with their clients.”

Professional networks are supposed to produce their own rewards – namely, increased numbers of referrals. Still, in certain cases striking a definitive revenue sharing agreement might make sense, points out Ed Friedman, who oversees practice management at Dynasty Financial Partners.

“Larger firms and major centers of influence sometimes prefer more formal relationships where any possible monetary rewards are clarified and negotiated up front,” he says.

But even if the BICE largely stands as it’s written now, he believes the impact to most FAs in terms of monetizing networking efforts will be “on the margin.”

By and large, Friedman says, “advisors should be focusing on longer-term relationship building in reaching out to centers of influence, not creating short-term fixes to generate new revenue.”

Former securities and Erisa lawyer Scott MacKillop agrees. Now an advisor and chief executive at Denver-based First Ascent Asset Management, he’s decided to steer clear of negotiating revenue sharing arrangements with outside experts.

“We’re trying to make this process as smooth and transparent as possible by refusing to get more deeply involved with all of the paperwork and compliance responsibilities that accepting money for our outside referrals might involve – not only for ourselves but for our clients as well,” says MacKillop, whose startup indie RIA manages about $67 million.

With his prior experience as an attorney and focus on managing portfolios for other advisors, MacKillop admits to seeing plenty of opportunities to negotiate revenue sharing deals when making referrals to outside professionals. “We’re giving up some revenue to be sure,” he says.

But the idea, MacKillop adds, is to consider referrals as a source to create goodwill and spread understanding of his firm’s value with key advisory shops and professional centers of influence.

“We’re making a conscious decision to remain fee-level fiduciaries on the belief that down the road people will respect our efforts to protect our objectivity in doing what’s best for our clients,” he says. “It might be a rather naive view of the business world, but that’s the way we’re choosing to deal with this changing regulatory environment.”