The Department of Labor’s new fiduciary rules could be adopted in 2016, and advisers will need to study up on how they’ll be affected.
The DOL proposed the new rules to “require more retirement investment advisers to put their clients’ best interest first, by expanding the types of retirement investment advice covered by fiduciary protections,” according to its fact sheet. They’re also meant to update Employee Retirement Income Security Act (ERISA).
The new rules would bring some significant changes.
“Advisers will have two options for providing individual retirement account (IRA) recommendations,” writes Scott Stolz for benefitspro.com. They include allowing the adviser to serve as a fiduciary under ERISA without conflicts. Or, the adviser will serve as an ERISA fiduciary with conflicts under the Best Interests Contract Exemption, or BICE.
“This exemption is the DOL’s attempt to allow for a compensation model similar to the majority that exist today,” Stolz writes, and it allows for “reasonable” compensation that advisers disclose. They’ll need to create contracts with each client to verify their recommendations aren’t biased.
“While serving as an ERISA fiduciary is the more restrictive of the two options, it is also the clearest. I predict that many advisers will take this more conservative route,” Stolz writes.
If that happens, they’ll need to offer annuities that pay zero commissions and can be sold in a fee-based account. “For those advisers that take the ERISA fiduciary route, this will be their only option for selling annuities.”
If advisers are taking the BICE route, they’re not subject to any language suggesting they can’t use a fee-based account structure. Stolz believes commission structures will change in the future, away from those that might be 5 percent or more up front, to 1 to 3 percent upfront with what he calls an “annual trail.”
“Up to this point, the industry has had little success getting advisers to offer annuities in fee-based accounts,” Stolz writes. “At the same time, all of the no-load or low-load annuities introduced to date have had to compete with a commissionable alternative to the same product. Take away that alternative and fee-based options will have more success.”
The new fiduciary rules would force transparency, writes Greg Iacurci for Investment News.
“That could make annuities more palatable in the retail market because the ‘perception of cost’ is a major barrier to their adoption,” he writes.
Still, it’s not necessarily a done deal. Lawmakers who oppose the rules are now working to pass laws that “establish a standard of conduct for advisers that supporters say would be more accommodating to commissions and proprietary products,” writes Kenneth Corbin for Employee Benefit Adviser. “Critics have charged that it would effectively ban commissions and push advisers into a costlier, fee-only model that would inevitably leave millions of investors without access to retirement advice.”