Fearless in the Face of the Fiduciary Rule

October 21, 2016

Will the new U.S. Department of Labor fiduciary ruling disrupt the retirement investment planning marketplace? Firms such as Merrill Lynch are already starting to make changes to their processes by adopting fee-based IRA accounts, and further changes to the industry are anticipated.

While it seems perfectly reasonable to increase regulations to protect investors and ensure that advisers are giving honest advice, the ruling could potentially have unintended negative consequences on both advisers and investors. The ruling removes significant incentive for veteran advisers to remain in the industry or new advisers from entering the marketplace because of the reduction (or elimination) of commissions. Further, this ruling may create high overhead for financial institutions to comply with regulation standards, which could potentially be passed down to investors. Additional documentation, tracking and reporting are a few examples of the overhead. So how are financial firms changing processes right now due to this ruling, and what are the anticipated changes to the market based on this ruling?

High levels of internal restructuring

Though there are few companies that have made definitive, public changes to their business processes in order to monitor the activity and compensation for retirement planning advisers, some changes are already starting to take place:

Adopting a managed service model: Other firms may follow suit with Merrill Lynch in switching over to a managed service model in order to avoid the Best Interest Contract (BIC) provision. In this case, the activity is paid a flat fee for the assets either by transaction or on an annual basis. This creates a gap in the time and documentation that is required to complete a transaction to the value of the compensation. To adjust for this, firms may establish thresholds of assets that advisers will manage - $100K, $250K, etc. If investors do not have that level of asset, they may not have access to the advice you need from a qualified adviser as a client/investor.

Restructuring the sales force: Firms are also optimizing the way they structure and support their sales force by reducing non-productive time by advisers spent tracking their own commissions. By implementing readily-accessible reporting and compensation management solutions, building trust in the calculations, and bringing transparency to the commission process, advisers can have more time and room for selling as well as manually documenting the sale and advice given in order to adhere to the new regulations in place.

Increasing transparency: In order to ensure transparent processes to track that the correct advice was given for each situation, some companies are requiring narratives to be done for each new client and addendums to the narratives for the rationale of the sale and plan approach. Since high auditability is needed under BIC standards, firms are also adopting reporting and tracking solutions such as sales performance management tools in order to gather transparent and readily-accessible data to prove compliance. Under BIC, firms must also maintain a website that includes the firm’s business model, policies regarding conflicts of interest, and disclosure of compensation and incentive arrangements with advisers.

As financial institutions are impacted with compensation changes and increased regulations, firms must consider questions including:

  • What reporting tools are in place to track the current compensation structure for advisers?
  • Is your compensation positioned to support advisers continuing to sell retirement products with appropriate controls?
  • If there was an audit for compliance according to this new rule, what kind of paperwork could be produced?

Industry predictions and future impacts

Moving forward, the industry will be watching for impacts to the retirement planning investment sector for both investors and advisers. There may also be a chance that advisers may leave the industry because of reduced compensation opportunities. Advisers selling qualified annuities are likely to be impacted more than others due to the extra documentation and processes involved. In fact, annuities themselves may lose their purpose and not hold as much weight in this sector. Further, the overhead to support the ruling may severely impact the operational costs to investment firms, such as the costs of restructuring or implementing new compensation models compliant to the ruling, purchasing new technology for monitoring/tracking activity, filing the necessary additional paperwork, and other indirect costs of a changing marketplace.

Fee structures may change as well with examples of the 12b-1 fee being replaced with an advisory fee upfront due to overhead as well. Additionally, ‘A shares’ may be discouraged due to the upfront commissions in lieu of advisory fees or other flat fees. Investment firms may potentially incur costs to establish a new class of shares to support the change. New classes and fees will need to be developed and smaller companies may be impacted heavily, as they may not be as nimble as larger firms.

The changes become effective in April 2017, and full automation is expected by January of 2018, which will include websites for the exemption. If your firm isn’t already on the move to restructure your compensation model and establish practices for compliance, now is the time to examine your current compensation structures and monitoring tools to draw up a plan to keep your business protected and thriving during these upcoming changes.

What are your predictions for the retirement investment planning sector moving forward, or what topics still need to be addressed in terms of the DOL ruling? Leave your thoughts in the comments below.

For a more comprehensive list of questions to consider structure changes based on the fiduciary ruling and to assess your current situation, send us an email.



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