Since Raef Lee and I completed our whitepaper The DOL’s Game-changing Fiduciary Rule: What Should You Do?, it seems that we have become a clearinghouse for conversations about the fiduciary rule. We get emails or calls almost daily, asking for opinions, seeking clarification or asking for presentations to groups. What has been interesting to me, now that the rule has been out for a while, is the amount of competitive ads and media reports springing up – including an episode of HBO’s Last Week Tonight with John Oliver called Retirement Plans. (I should mention there is NSFW language in it.)
That episode has been emailed to me no less than 10 times since it aired, and each time, I responded that I think this is only the beginning of what consumers will be hearing over the next year. Most of the e-mailers reference flaws in the understanding of what a startup plan would cost, debate active vs. passive or are just relieved that their companies were not mentioned in the piece.
But most were concerned about the negative public perception of our industry fighting against putting our clients’ best interests first.
They were concerned or excited (depending on who sent it) about how advisors would answer one of the fundamental questions of the segment, “Are you a fiduciary?” (Spoiler alert: it went like this… “If you have an advisor, ask if they are a fiduciary. If they say no, RUN.”)
Your answer to that question may depend on which Best Interest Contract Exemption (BIC) you use.
To BIC or not to BIC
Probably one of the least understood sections of the new DOL law involves BIC Exemptions. People are throwing around the term BIC as if there is only one type (there are at least 4) and that all BICs are the same (they are not). More importantly, how advisors use each BIC will determine the answer to the “Are you a fiduciary?” question for your clients. To me, it all boils down to disclosure or a written contract.
For today’s conversation, let’s focus on two BICs – the level fee fiduciary (or BIC “lite”) and the full contractual BIC. As you can see from the accompanying chart, the level fee fiduciary has a lower hurdle to get over in disclosing his/her compensation.
Information intended for educational purposes only and should not be interpreted as legal opinion or advice.
The level fee advisor must:
- Disclose they are acting as a fiduciary (and by acting as a fiduciary, they cannot be compensated by anyone else other than the client)
- Meet the impartial conduct standard as it pertains to prudent recommendations, reasonable compensation and no misleading material statements
As you can see, while adding some compliance and paperwork, being a level fee fiduciary is not too burdensome for most advisors, especially those who are already fee only and fee based. With that in mind, I am not really sure why the DOL decided to call it a BIC, as there is no contract to sign.
The advisor who uses the contractual BIC exemption has a much higher hurdle to jump over, including all the previous documentation plus:
- Onboarding and transactional disclosures of compensation at least annually
- Disclosing policies and procedures regarding services, products compensation, etc.
- The designation of a compliance officer
- Notifying the DOL of the advisor/client relationship
- Providing recordkeeping and access to regulators
- Providing a written contract between the client and the broker dealer, which opens the door to the potential of class action lawsuits
How will you answer?
It seems to me that as far as the Department of Labor is concerned, there is a very simple test that will determine if an advisor is a fiduciary – and it comes down to compensation. If anyone is paying the advisor other than the client, the advisor is not a fiduciary.
The DOL has provided relief to the advisor with the best interest contract exemption to the law. But who is going to give you time to explain about contracts when the client is asking a simple yes or no question – “Are you a fiduciary?”
The danger of splitting hairs
While we are still on the fiduciary topic, I think it only makes sense to deal with the other elephant in the room – non-qualified assets. What does the conversation sound like when your clients ask about being a fiduciary with all their assets, not just the retirement accounts?
According to the 2015 PriceMetrix research report, The State of Retail Wealth Management, the average advisor manages assets for 150 households. You have to believe that many of those accounts (certainly not all, maybe not even half) are non-qualified. How does the conversation go? “Yes, I am a fiduciary on your qualified accounts, but not on your non- qualified.”? Will this cause them to “RUN” because your client watched Last Week Tonight or read similar advice elsewhere?
My advice (no contract needed) is to get started today:
- Bone up on the rule – understand how it affects you. Not your BD, not your OSJ, not your friend’s business – you. How does it affect your business?
- Assess your book – look at qualified accounts first. Figure out which accounts are affected by the law and think about how you want to move forward. Do you want to/need to make changes?
- Segment – segment those accounts you want to convert, those you will keep the same and those you’ll discard or orphan.
- Execute – are you ready to have 150 conversations with your client households? Having a conversation for every family is going to take time. This should not be a reactive conversation when they call; it needs to be proactive to get in front of the law.
In our paper, we suggested that the consumer is going to drive the fiduciary rule. The Last Week Tonight story was one of the first salvos in the education of consumers, teaching them to ask, “Are you a fiduciary?”
What are you going to say?