What is clear from DOL's fiduciary FAQs — and what requires more guidance

Answers released last week give clarity on some issues, like fee-based advice and recruiting incentives, but are obscure on reasonable compensation

Oct 31, 2016 @ 1:54 pm

By Mark Schoeff Jr.

The first round of frequently asked questions from the Labor Department for a regulation that raises investment advice standards for retirement accounts is a combination of prescription and general guidance. 

The DOL tends to like investment advice that is paid for by fees on assets, but provides safe harbors for the brokerage model. It offers some specific direction for pay-incentive structures, but declines to define reasonable compensation.

The 24-page, 34-question document doesn't have the clarity of the 10 Commandments. Financial advisers making their way back from this first trip to Mount Sinai don't have as vivid a roadmap for avoiding swerving into the sin lane.

(Related read: FAQs: The most comprehensive fiduciary database)

This much is clear(ish):

Don't look for a break on the implementation date. Even if Hillary Clinton is elected president, it doesn't look as if the DOL is willing to budge on the April 10, 2017, date by which time financial advisers to 401(k), individual retirement accounts and other qualified accounts will have to start meeting the basic criteria for acting in the best interests of their clients, such as charging reasonable fees and not misleading them. Full implementation of all requirements of the best-interest contract exemption remains fixed at Jan. 1, 2018.

The DOL seems to prefer investment advice that is doled out for a fee rather than linked to commissions or third-party revenue. It devotes seven questions to how “level-fee” advisers can avoid the full brunt of the BICE. But the agency also warns against reverse churning, which occurs when clients who do little trading are moved from brokerage accounts to fee accounts. The agency also makes clear that it has nothing against hybrid firms that offer both level-fee as well as commission-based services.

Online automated advice gets a nod from DOL. Labor Secretary Thomas Perez has praised the robo-advice model in appearances before congressional committees. The DOL guidance also gives this emerging part of the market a boost by stating that “the marketplace for robo-advice is still evolving in ways that appear to avoid conflicts of interest.”

The DOL is intent on stopping broker recruiting incentives based on sales. One of the questions is devoted to a discussion of so-called “back-end awards” that are contingent on a broker hitting “revenue or asset” targets. The DOL says that such provisions “create acute conflicts of interest.”

Unlike a Finra rule designed to increase investor awareness about the potential dangers of recruiting packages, the DOL rule is likely to sink sharp teeth into the practices.

What is unclear — or at least could do with a little more guidance?

How compensation grids should be put together to avoid paying advisers more for high-commission funds is outlined by the agency. It says that compensation can differ between investment categories based on “neutral factors,” such as the amount of time an adviser spends on recommending an investment. But the FAQs don't provide much more detail about how it defines these factors.

Reasonable compensation is still in the eye of the beholder. Advisers who are sitting on the edge of their chairs waiting for DOL to declare the parameters for reasonable compensation will have to maintain their perch. The DOL guidance doesn't provide specifics other than saying that the market sets the norms.

“The reasonableness of the fees depends on the particular facts and circumstances at the time of the investment advices,” the FAQs state. “The essential question is whether the charges are reasonable in relation to what the investor stands to receive for his or her money.

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

A big lesson from this first batch of FAQs: The DOL wants to be your friend. The agency is maintaining its good-cop posture as it rolls out the rule. “The department's general approach to implementation will be marked by an emphasis on assisting (rather than citing violations and imposing penalties on) plans, plan fiduciaries, financial institutions and others who are working diligently and in good faith to understand and come into compliance with the new rule and exemptions,” the FAQ states.


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