Practice Management

Advisers Can’t Respond Unilaterally to Final Fiduciary Rule

A given financial adviser’s response to the final fiduciary rule from the Department of Labor may have more to do with the adviser’s brokerage platform provider than their own decisionmaking about how to adjust.

By John Manganaro editors@assetinternational.com | April 20, 2016
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Three ERISA experts speaking during a webcast hosted by PLANADVISER and Voya Financial on the Department of Labor’s (DOL’s) final fiduciary rule all warned that retirement plan advisers will have to coordinate responses to the rulemaking closely and carefully—both within their own firms and with service provider partners—especially brokerage and investment platform providers.

After stepping through the basics of the pending fiduciary reform, Bradford P. Campbell, counsel at Drinker Biddle & Reath LLP and former head of the Employee Benefits Security Administration (EBSA), suggested that advisers’ own plans for responding to the new regulations may be superseded by those of investment providers or other service provider partners. At the very least, advisers will have to make sure the response they would like to implement will still be possible after any pending changes their brokers or other service provider partners may themselves choose to make.

“For advisers who find themselves becoming fiduciaries for the first time, a lot of the response will be determined by how your broker is going to want to handle the Best Interest Contract (BIC) exemption,” Campbell explains, noting that both before and after the final rule language emerged, the BIC has been a major point of contention. “At a very high level we believe there will basically be three responses that brokerage platforms are going to take, and which advisers will have to take into account in adjusting their own business models.”

First is the model that the DOL, it’s fair to say, is trying to encourage through the strict new rulemaking and the wide expansion of the number of fiduciary advisers. “This would be the full level-fee approach, taking away all sources of variable compensation to get around the prohibited transaction concerns entirely,” Campbell explains. “This will be attractive because it will be by far the most simple and direct way to comply with the final rule, making sure all compensation for all advisers selling on the platform is reflected in the one level fee that gets presented to the client. It’s attractive, but it be difficult to pull off for many firms that have not previously structured their business this way, especially in the short 12-month timeline the DOL has given us.”

Second will be essentially the opposite approach. “This will mean brokers deciding they are OK with relying fully on the BIC for pretty much all of their client relationships, which will also be tough because of the extensive disclosure requirements that go along with papering the BIC, even under the final rule, which has been softened from the original pretty substantially,” Campbell explains. “This will be the approach for brokers who are unwilling or unable to forgo variable compensation and commission-based models for advisers, especially in the short term.”

NEXT: More on brokers’ potential response