PANC 2016: Fiduciary Rule Aftermath for Non-RIAs

There are many anticipated avenues of disruption associated with the DOL fiduciary rule, but clearly the most direct influence will be felt at the point of sale of financial products used in ERISA plans. 

Expert panelists at the 2016 PLANADVISER National Conference offered up some important food for thought regarding nonregistered investment advisers (non-RIAs) serving the qualified retirement plan arena at a time of major regulatory change.

It won’t be news to readers of PLANADVISER that a new fiduciary standard will be enforced by the Department of Labor (DOL) starting in April of next year—a standard that will apply much more broadly and strictly than the one enforced under current law. Today there is still much room for advisers to deliver products to tax-qualified retirement plans in a nonfiduciary capacity, observed panelist David Kaleda, a principal with Groom Law Group Chartered. However, this space is going to collapse very quickly under the new fiduciary rule, which will designate essentially anyone offering advice for a fee to retirement plans a full-fledged fiduciary.

“At the end of the day, the big focus is on the sale of investment products to ERISA [Employee Retirement Income Security Act] plans,” Kaleda suggested, “particularly as it pertains to the commission-based sales forces, or non-RIAs. The DOL is very clear that it sees no distinction between selling products to investors and providing investment advice. It doesn’t think that investors grasp the difference, and so it’s doing away with it.”

Commission-based sales forces pushing products out to the ERISA market, if they want to continue working in this capacity, will have to find ways to leverage the best-interest contract exemption, known as the “BIC” or “BICE,” Kaleda predicted. This won’t be easy, but it might not be as hard as some predict, either.

“The BIC is the way of the DOL providing an avenue to get paid per transaction in a much more controlled way that still agrees with the spirit of the new fiduciary rule,” Kaleda said. “Again, it is still possible to make it work with transaction-based comp. There will be a lot of use of the BIC. There is a lot of doom and gloom out there, but in my opinion it is workable.”

Panelist Irene Scalfani, managing director for firm relations at Principal Financial Group, agreed with that assessment, highlighting that RIAs and non-RIAs alike are still engaged in the heavy lifting of interpreting the rulemaking and applying its requirement to their unique businesses.

“I am not exaggerating when I say we’ve got a team of 200 people focused on digesting all the different aspects of the regulation,” Scalfani observed. “And it will continue to be an ongoing thing for the next several months. Even if you are a firm that feels you have all the necessary processes in place today to comply with the new rule, reporting changes at the very least will be in store for everyone, and more likely than not there will have to be real changes and adjustments to compensation.”

NEXT: Making It Work 

John Moody, another esteemed panelist, who serves as president of Matrix Financial Solutions, agreed with these points, suggesting in no uncertain terms that advisers who are not looking at this new fiduciary rule as an opportunity should start packing it in now.

“There is no doubt that this is daunting for non-RIA advisers,” Moody said. “We get it. We are a shop that allows brokers to collect 12(b)1 fees directly from mutual funds. I’ll be frank, it’s hard to picture how we are going to ensure level compensation in our environment, so we’re having to engage with all of our partners and have really deep conversations around how to adjust. It’s dramatic change in terms of how we are thinking about levelizing compensation.”

The panelists all speculated that some advisories will look to change their DNA, to become flat-fee-only firms. As Kaleda put it, “You need to figure out how much of your business is individual retirement accounts [IRAs], how much is in 401(k), how much in HSAs [health savings accounts], or any other qualified account structures that could be impacted. Then you analyze the structure of the compensation. Talk to your supervising firm, asking, ‘What direction are we going to go?’ It might not have all the answers right now, but it’s having the conversations internally. You can contribute to this.”

Many firms engaged in this internal conversation are looking to go fee-only, but not every firm, Moody said. Some are working toward reforming their platform structures to ensure compliance, and others are putting more levelized product inside their platforms.

“It will be largely on the supervising broker to construct these policies and procedures around the new fiduciary rule,” Scalfani and the others concluded. “But you as the individual adviser should expect to keep additional records and do potentially much more monitoring. It’s going to change the way you do things every day.”