Adviser compensation, rollovers most complex factors under DOL fiduciary rule

Determining adviser compensation and recommending rollovers from 401(k) plans present the greatest challenges for broker-dealers and their representatives under the Labor Department’s fiduciary rule, according to Fred Reish, a partner at Drinker Biddle & Reath.
Such factors, are vastly different from the current operating environment for brokerages, their advisers and other financial institutions, Mr. Reish said Monday evening on the sidelines of the 2016 American Society of Pension Professionals & Actuaries Conference in National Harbor, Md.
Adviser compensation under the best-interest contract exemption — a central component of the regulation allowing brokers to receive variable compensation, such as commissions and 12b-1 fees, if certain standards are met — is “probably the single most complicated thing in the whole rule,” according to Mr. Reish.
The compensation calculation under BICE has to occur at two different levels: that of the broker-dealer, and that of the adviser, he said.
While the commission a broker-dealer receives from an adviser’s sale of an investment product can be “variable” — Company A’s variable annuity can pay a higher commission to the broker-dealer than Company B’s, for example — the firm must ensure the compensation is “reasonable.”
At the adviser level, though, payment must be “level” and “reasonable” across all products.
In other words, Company A’s annuity may pay the broker-dealer a higher commission than Company B’s, but the portion of that commission paid to the adviser by the brokerage for the annuity sale must be the same — or level — regardless of which annuity is selected.
Further, any differences in compensation between investment categories at the adviser level must be justified by “neutral” factors, such as time, complexity, effort and value, Mr. Reish said.
For example, broker-dealers may determine an adviser should receive a 2% commission for selling a mutual fund, but 4% for selling a variable annuity based on the greater amount of time and effort spent by the adviser on such a product.
Brad Campbell, counsel at Drinker Biddle & Reath and former head of the Employee Benefits Security Administration, said during an Oct. 13 audiocast that such calculations are common to firms looking to use BICE.
Further, rollovers are one of the primary topics of inquisition from clients, Mr. Reish said on the same audiocast.
“This is across the board: the wirehouses, the broker-dealers, the insurance companies, the RIA firms,” Mr. Reish said. “This seems to be the one question that comes across every type of adviser or agent.”
A recommendation to roll money from a 401(k) to an IRA will require a much greater level of due diligence and documentation under the fiduciary rule than is the case presently, Mr. Reish said.
For example, advisers need to gather information such as investment options, expenses and services in both the IRA and 401(k) plan, and perform a comparative evaluation in order to make a best-interest determination.
“If there’s one area I think you need to be the most highly attentive to under the new rule, this is it,” Mr. Reish said.