DOL fiduciary rule FAQs emphasize dangerous compensation practices — including for RIAs

While brokers will see the biggest shift under the new regulation, Labor Department guidance includes clarification of requirements for advisers rolling assets into IRAs

Oct 28, 2016 @ 1:29 pm

By Mark Schoeff Jr.

Most of the impact of a Labor Department regulation to raise investment advice standards for retirement accounts hits brokers, but investment advisers also have to comply with the measure — a point that was emphasized in agency guidance this week about the rule.

In a 24-page document that covered 34 questions released Thursday, the agency answered some of the most frequent queries they're getting about the rule, which requires advisers to 401(k) plans, individual retirement accounts and other qualified accounts to act in the best interests of their clients.

Seven of the questions focus on “level-fee fiduciaries.”

(More: The most up-to-date information on the DOL fiduciary rule)

Under the regulation, investment advisers who charge a fee based on a client's assets that doesn't vary by investment products they recommend do not have to sign the so-called best-interest contract exemption with clients — a legally binding agreement that comes with a host of disclosures and other requirements.

But level-fee investment advisers who recommend that clients roll assets out of a 401(k) plan into an IRA must “document the reasons why the advice was considered to be in the best interest of the retirement investor,” the DOL guidance states, if the fee the adviser charges is higher than the 401(k) fee.

The discussion of level-fee advisers was the agency's way of telling registered investment advisers to pay attention, according to Brian Graff, chief executive of the American Retirement Association.

“You've got to document the decision process on the rollover,” Mr. Graff said. “That's something that RIAs have not been required to do to date. There's a lot of [RIA] firms that think the rule doesn't apply to them, and they're wrong.”

The regulation will have the biggest impact on brokers, who currently must sell investment products that are suitable for their clients, a less-stringent standard than the best-interest requirement of the DOL rule. Investment advisers already adhere to a best-interest, or fiduciary, standard.

Signing the best-interest contract allows brokers to accept commissions, revenue-sharing and other variable revenue. The DOL's guidance document clarifies that even if commissions or other third-party payments are leveled among products, the level-fee exemption, known as “BICE light,” cannot be used by the broker.

“That's unfortunate because it significantly limits the applicability of the level-fee option,” said Bradford Campbell, counsel at Drinker Biddle & Reath.

The level-fee provision was a priority for the investment-adviser part of the industry.

“We're proud of that,” Jeff Brown, senior vice president and head of legislative and regulatory affairs for Charles Schwab & Co., told advisers earlier this week at the Schwab Impact conference in San Diego. “As fiduciaries, you've always been in that space.”

But the DOL guidance didn't give a completely clean bill of health to level fees. It also said “there is a clear and substantial conflict of interest” in so-called reverse churning, which occurs when a client who does little trading is put in a fee account that costs more than a commission-based account.

The DOL clarified all the permutations of compensation that might get advisers in trouble, said Charles Field, partner at Sanford Heisler.

“I thought they did a pretty good job,” he said. “It essentially laid out when you were getting close to the line and when you were getting chalk on your feet.”

The DOL has said it will release two more guidance documents before the end of the year. Implementation of the rule will begin in April.


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