Revised revenue allowances and other adjustments, originally praised by advisers, are turning out to be less advantageous than expected
A handful of changes the financial advice industry praised when the final DOL fiduciary rule on retirement advice came out in April are turning out to be less advantageous than expected.
For one, the rule that allows advisers to use product revenue within the best-interest contract exemption has become difficult when it comes to ensuring there’s no conflict of interest for the adviser.
Additionally, the “grandfathering” of pre-existing investment advice within retirement plans and the allowance of advisers to engage in normal marketing of their services without making the adviser a fiduciary are items professionals thought were good news, but have become thorny as firms imagine implementing the rule.
“Some of these things that seemed to be wins are turning out to be more complicated,” said Tom Corra, executive vice president and chief operating officer at Fidelity Clearing & Custody Solutions.
Regarding the product revenue concerns, it’s a challenge to show there’s no adviser conflict, he said.
The solution seems to be limiting the product set and leveling the adviser compensation within each of the product categories. However, that’s especially difficult with mutual funds that have different loads and share classes, Mr. Corra said.
The answer may involve firms setting their own fee schedules and loads, but the Securities and Exchange Commission would have to give them relief from rules that say only a mutual fund company can charge a load, he said.
“The jury is still out on how this is going to happen,” Mr. Corra said.
The rule’s grandfathering provision gives advisers and brokers an exemption for transactions based on investment advice provided before the rule’s applicability date.
This was something the industry expected to be using a lot. But it, too, has proven trickier than expected.
For instance, if there’s a systematic investment plan in place and the investor boosts the amount going into the plan, there will need to be a BICE in place. But where does that happen in the workflow, Mr. Corra wondered.
Advisers who use the grandfathering provision need to notify clients within 30 days of the rule’s April 2017 implementation date that they will be operating as they have been and be receiving compensation from investments they’ve previously recommended.
The challenge is that any interaction with those clients about their investments, including just a quarterly meeting to discuss portfolio performance, would likely trigger some type of fiduciary action and fall under needing a BICE or an account switch to a level-fee account, said Matt Matrisian, senior vice president of strategic initiatives for AssetMark.
Either of those moves would then trigger at least a second communication with clients about adviser compensation, and advisers probably don’t want to keep bugging clients with notices about how they are being paid.
“Grandfathering is a very temporary solution,” Mr. Matrisian said.
The provision will likely be most useful for advisers who are not prepared for the April 2017 rollout of the rule and need more time, he said.
“The challenge for advisers is they need to think about how they want to interact with clients and what type of relationship they want to have with them,” he said. “If they’re going to make a shift to advisory fees, they need to do it sooner, rather than later.”
A third difficulty is with the “hire me” conversations advisers have with prospects.
The DOL rule says advisers can market or tout their own services without being considered a fiduciary. However, that “hire me” conversation can cross the line as soon as it includes thoughts on how to invest or manage retirement plan or individual retirement account assets, such as whether to roll assets from a defined-contribution plan into an IRA or other plan.
“This is going to be difficult to implement across the board,” Mr. Matrisian said.
As soon as a client starts talking about shifting assets to other types of accounts, it seems the interaction moves to a recommendation, he said.
Ultimately, there will have to be more documentation and universal disclosure about advisers’ conversations with clients and prospects to cover all bases.