PANC 2016: The New Fiduciary Rule

What advisers need to know and do now.

The new fiduciary, or conflict-of-interest, rule from the Department of Labor (DOL) expands the type of advisers deemed to be fiduciaries to individual retirement accounts (IRAs) and retirement plans, according to Tom Clarke, of counsel with the Wagner Law Group.

He told attendees of the 2016 PLANADVISER National Conference in Orlando that the new rule targets broker-dealers and registered representatives. It impacts registered investment advisers (RIAs) who offer rollover advice and managed account offerings.

With the new rule, the previous five-part test for determining whether someone is offering fiduciary advice is gone. Now, essentially, there is a two-part test, Clarke said—whether someone makes a “recommendation” and is paid a fee. He added that the rule defines a “recommendation” as anything that can be reasonably viewed as a suggestion to engage in a particular course of action.

There are still questions about whether some things are considered “recommendations” under the new rule, and the DOL has promised some soft guidance about this, according to Clarke. “Now recommending a provider is a fiduciary duty,” he said. “For example if an adviser does a [request for proposals (RFP)] and makes any quantitative statements about the results, that is a fiduciary act. If a wholesaler says, ‘I think you should use this adviser,’ that can fall into the category of recommendation.”

As a result of the rule, some advisers are in the process of selling their wealth management businesses, according to Clarke. Others are hiring certified financial planners and buying wealth management companies, while some are partnering with third-party wealth management providers.

Things to do now 

Advisers should identify all products and services offered to retirement plans and individual retirement accounts (IRAs) and confirm they have adequate supervisory control in place, according to Clarke. They should also identify all instances of variable compensation.

Advisers should develop a compliance strategy with Employee Retirement Income Security Act (ERISA) counsel—whether they are going to use best interest contracts (BICs), are going to move to fee levelization, whether they are going to use the same business model or a different one. “Your business model will depend on your capability—the people you have or will have—and your business growth strategy,” he told attendees. Adviser firms will also have to train employees.

The first deadline for the new rule is April 10, 2017. “A ‘transition’ BIC requiring disclosure should be used, and a BIC exemption officer should be designated,” Clarke said.  As of January 1, 2018, advisers should use a full-blown BIC for IRA and ERISA plan clients. Negative consent is permitted, Clarke said.