Fiduciary rule shifts power to broker-dealer compliance departments

As firms try to limit their liability under the DOL rule, new problems have arisen

Mar 14, 2018 @ 11:12 am

By Fred Barstein

The DOL fiduciary rule was a wake-up call for many broker-dealers, some of which had paid little attention to defined contribution plans like 401(k)s in the past. Even broker-dealers that had focused on DC plans have made significant changes as a result of the new rule promulgated last June. There is debate about whether these changes are good or bad, but no one is arguing that compliance departments gained greater power over how their advisers interact with 401(k) and 403(b) plan sponsors and their employees.

With a focus on risk management and transparency, many broker-dealers either eliminated or restricted the use of commissionable products and annuities with high upfront payments. As a result, some advisers exited looking for more friendly confines. Overall, compliance departments limited the number of investment products and record keepers available.

The main motivation for broker-dealers to make changes as a result of the DOL fiduciary rule was to limit their liability, especially for emerging plan advisers who are not willing or able to act as ERISA fiduciaries. Ninety percent of advisers who work or get paid on a defined contribution plan have less than $25 million in DC assets under management, making up one-third of the adviser-sold DC assets and roughly half the plans, according to research from The Retirement Advisor University. The DOL rule's less restrictive fiduciary definition would have include most of these emerging plan advisers, even though few are equipped or trained to act as one.

That is what concerned senior management at most broker-dealers who, in turn, granted more power to compliance departments to overseer the interaction of their advisers with DC clients and participants.

Compliance departments reacted byrequiring advisers who want to act as a fiduciary to have a minimum amount of experience in terms of DC plans, assets and years in the business. Others are either forced to partner with fiduciary advisers in the firm or use packaged products that include outsourced 3(21) or 3(38) fiduciary services.

Concerned about DC plans that were either grossly overpriced, under-serviced or contained commissioned or annuity products no longer allowed by the broker-dealer, many firms have forced their advisers to repaper all plans. As a result, there has been more transparency and, in some cases, lower pricing with more experienced advisers servicing the plans — but certainly not without extra work for advisers and their clients.

That all sounds rosy, right? But problems remain, and new problems have arisen as a result of the shifting of power to compliance departments.

Access by elite plan advisers may be limited given restrictions imposed by compliance departments that have overstepped their bounds. A national broker-dealer that has both an employee and independent model lowered the payout to an elite independent plan adviser by more than 6%, citing costs to comply with the DOL rule.

Further, some broker-dealers are generating additional revenue by acting as a 3(8) or by creating custom products, usually target date or default options. Didn't broker-dealers get out of the asset management business because of the inherent conflicts involved in having their advisers selling proprietary products? Wasn't the DOL rule intended to eliminate conflicts, not create more?

The concern among plan advisers is whether their compliance teams understand the DC market, which is exponentially more complex than the wealth management business, and whether they understand the unintended consequences of their actions. Still, more power has shifted to broker-dealer compliance departments as a result of the DOL fiduciary rule and there's no end in sight.

(More: 401(k) advisers vs. institutional consultants: On a collision course?)


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