The DOL Letter & You

Will the Department of Labor’s new ERISA fiduciary rule be a big deal or “no big deal?”

For financial institutions and investors, it isn’t yet clear. But for financial advisors, it’s definitely a big deal. Advisors are the focal point of the rule, and for many it could soon require strategic decisions with career-changing impact.

This may soon become clear in the $7.3 trillion IRA market. Although the Department of Labor (DOL) says its proposed Best Interest Contract (BIC) exemption will preserve existing business models, IRA advice would be brought under fiduciary relationships subject to new impartial conduct standards, warranties, and detailed transaction disclosures. Under the proposal, IRA advisors would face additional liability, paperwork and compliance costs. Meanwhile, some of the most lucrative IRA compensation sources of the past (e.g., mutual fund trails and commission-based variable annuities) could disappear.

If DOL adopts the rule in the first half of 2016, as expected, IRA advisers will be required to make key decisions by early 2017, when the expected transition period expires, and the rule may not leave many choices in shades of gray. If advisors can’t commit to serving IRA clients as ERISA fiduciaries, they may be forced to exit this market altogether. Thousands of advisors who exit this market could choose to hand over their IRA business to advisors who stay, rather than exposing the balance of those clients’ portfolios to competitors.

Also, more advisors will choose to become retirement plan specialists. It’s important to know that the BIC exemption applies not only to the individual IRA market but also the fast-growing market of employer-sponsored IRAs (SEPs and SIMPLEs). Under DOL’s proposal, a “retirement investor” is any participant or investor of any ERISA plan who either directs assets or takes a distribution. So, complying with the BIC template will give advisers a track for providing advice to individuals regarding personal IRAs, employer-sponsored IRAs, 401(k) investment strategies, and rollover decisions. That track totals trillions of dollars of opportunity, and it could be less crowded with competitors.

It’s a very big deal, and now is the best time for advisors to learn as much as they can and start evaluating options. Here’s a good overview of the proposed BIC exemption: