RIAs have been slow to prepare for the DOL fiduciary rule

Many believe it is aimed at broker-dealers, but they could be in for a rude awakening

Dec 4, 2016 @ 12:01 am

By Mark Schoeff Jr.

Registered investment advisers are mesmerized by the Labor Department regulation that is introducing the most sweeping changes to financial advice in a generation — but not enough of them are preparing for it.

“There's going to be a rude awakening when RIAs really dig into this and start to see the additional compliance costs and regulations, as well as the potential liabilities in working with clients ultimately impacted by this rule,” said Duncan Rolph, managing partner at Miracle Mile Advisors.

As the April 10 deadline for initial implementation of the DOL fiduciary rule draws closer, wirehouses are announcing their decisions on whether to include commission-based products in IRAs. Independent broker-dealers also are trying to figure out how the rule could curb the sale of high-fee investment products that provide the bulk of their revenue.

Meanwhile most investment advisers cheer the regulation because they already meet the best-interest, or fiduciary, standard. But the fact that they are fiduciaries is lulling them to sleep on what the DOL measure will mean for their businesses.

“They think because they have the client's best interests at heart, that will suffice,” said Jason Roberts, CEO of the Pension Resource Institute. “It does not.”

The rule, which so far has survived a fierce six-year lobbying battle in Washington, requires advisers to act in the best interests of their clients in 401(k) plans, individual retirement accounts and other qualified accounts.

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

There's no doubt the brunt of its impact will be felt by brokers, who currently meet a suitability advice standard that is less stringent than the best-interest mandate of the DOL rule. But that doesn't mean advisers can keep hitting snooze, dreaming on that any changes to their channel will be minimal and can be dealt with as they come.


Worse yet, many RIAs assume the rule does not affect them at all, said Marcia Wagner, founder and principal of the Wagner Law Group.

“It's a widespread belief, but just because it's widespread doesn't make it true,” she said. “If they touch IRAs, if they touch 401(k)s, the regulation applies to them.”

It's not that RIAs aren't paying attention to the rule's controversial odyssey, which has included multiple industry lawsuits and fiery rhetoric from members of Congress. The regulation has faced additional uncertainty following the election of Donald Trump as president, because an adviser of his promised during the campaign to repeal the DOL rule

But today, tremendous changes are underway — yet most investment advisers have remained spectators.

“RIAs are watching the developments rather than making changes,” said Fred Reish, a partner at Drinker Biddle & Reath.

Investment advisers currently operate under the fiduciary standard that was set by the 1940 Investment Advisers Act and is administered by the Securities and Exchange Commission.

We see a fair number of RIAs who ... are inadvertently violating the law.—Fred Reish, partner, Drinker Biddle & Reath

It requires conflicts of interest to be disclosed and avoided as much as possible.

The fiduciary standard under the federal labor law, the Employee Retirement Income Security Act of 1974, requires that conflicts be eliminated. If they're not, then conflicted advice is only allowed through a prohibited transaction exemption.

(Related read: Historical timeline of fiduciary duty for financial advice)

The heart of the DOL rule revolves around such an allowance through the best-interest contract exemption. It gives an adviser the latitude to charge commissions, collect revenue-sharing or take third-party payments — activities that create conflicts of interest — as long as the adviser makes a legally binding commitment to act in the client's best interests.

“Their threshold for fiduciary seems to be more rigorous or complex than the one we are held to under the SEC,” Mr. Rolph said.


Most RIAs charge a fee for their services based on a client's assets under management. It is considered to be a fairly conflict-free form of revenue because advisers' pay is not determined by the investment products he or she recommends.

That puts RIAs on the right side of the DOL rule — but not in every circumstance.

For instance, when an RIA encourages a client to roll money from a 401(k) into an IRA, or when they advise a client to move from a brokerage account to a fee account, the client might have higher costs — and the adviser a new revenue stream — under the arrangement.

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

In such situations, an RIA who charges a “level fee” can use what's known as a “BICE-light,” or a best-interest contract exemption that has fewer requirements than the BICE that must be used if an adviser charges a commission or collects third-party payments.

But even a “BICE-light” comes with requirements that RIAs don't have to meet under the SEC fiduciary standard.

For instance, they must provide a written acknowledgment of their fiduciary status and record why the advice they gave to their clients was in the client's best interests.

“You've got to document and demonstrate real-world tangible benefits for clients,” said John Blood, CEO of Efficient Advisors. “The firms that haven't thought about that from a process standpoint are going to be behind the eight ball. It has to be engrained in your DNA.”

Prior to the DOL rule, RIAs felt assured that their fiduciary status, illustrated by their fee-generated revenue, was proof that they always acted in the best interests of their clients.

The DOL rule's big lingering questions

Now, at least in retirement accounts, they have to show rather than tell. That requirement goes beyond rollovers and transitions from brokerage to fee accounts. It also applies to custodial, solicitation, third-party wealth management, soft money and other arrangements.

“You need to be prepared to defend your fees,” Mr. Roberts said.

The best way to do that is to be forthright with your clients, according to Paul Tinnirello, chief operating officer at Bleakley Financial Group.

“It's about taking your clients through a comprehensive process and then documenting your interaction with them all along the way,” he said.

RIAs also need to be careful not to accept any gifts or other payments related to investment products if they want to maintain their level-fee status.

“We see a fair number of RIAs who don't understand that and are inadvertently violating the law,” Mr. Reish said.

Complying with the DOL rule can get complicated, even for RIAs. They should begin by doing an assessment of their client roster, according to John Anderson, managing director of practice management solutions at SEI Advisor Network.

“It's all about conflicts of interest more so than the advice,” he said. “At the individual client level, [RIAs] are not going to go through as much of an exercise as a broker, but that doesn't mean you shouldn't audit your book to make sure you don't have those conflicts.”

Recently, one industry official has seen signs that RIAs are beginning to take the DOL rule seriously.

“In general, the industry has begun to understand that RIAs are not off the hook,” said Rob Cirrotti, managing director of retirement and investing solutions at Pershing. “They should be assessing their business and establishing their plans of action for how they're coming into compliance.”


Most industry participants and compliance experts say those activities should not stop now that Mr. Trump is set to occupy the Oval Office. For one thing, despite his adviser's comment during the campaign, Mr. Trump has not expressed a position on the rule.

“If that's the case, how can anyone know what the outcome will be?” Mr. Reish said.

(Related read: Trump administration must overcome obstacles to kill DOL fiduciary rule)

Meanwhile, the implementation deadline looms.

“It makes sense to follow through the way the rule is written,” Mr. Anderson said. “We can always make modifications in the future.”

That's exactly what Robert Karn, owner of Karn Couzens & Associates Inc., is doing.

“We are working as hard as we can toward implementation,” he said. “We are assuming the rule will go into effect. If it changes, we'll be ready to make the change, but I can't assume that.”


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