Top DOL Fiduciary Rule Learnings from 2016

By Mark Peabody, SVP of Product Management


While the presidential election results have created some uncertainty regarding general regulation in financial services, wealth managers must continue to prepare their operations for compliance with the Department of Labor’s Fiduciary Rule in 2017. In fact, according to Marcia Wagner, Principal of the Wagner Law Group, specializing in ERISA law, “It would be an imprudent decision to cease or even slow down compliance efforts with the DoL Fiduciary Rule.”

The rule requires that all financial advisors offering guidance on 401(k) plan assets, retirement accounts, or other qualified monies saved for retirement must sign a Best Interest Contract Exemption, or BICE, if they accept a commission or participate in a revenue sharing agreement. This contract pledges that the advisor will act in the client's best interests and only earn “reasonable” compensation. The exemption also must disclose information to clients about fees and conflicts of interest. The burning question at hand is whether or not the BIC is broad enough for advisors who still offer commissionable products. If not, what options do they have to profitably serve their clients given the increased administrative costs of the ruling?

As we enter 2017 with an eye toward implementing DOL compliance procedures, here are a few learnings we can draw from.

1. “The beauty of the BIC is in the eye of the beholder.”

John Shields, a Director of Mainstay Consulting Group, recently imparted this wisdom. In other words, the success of the BIC exemption depends on the advisor’s willingness to take on risk. The BIC requires that audit trails and proper procedures are in place at both the firm level and the transaction level, increasing the time and resources required for compliance-related tasks, which in turn increases the cost per client and the exposure to litigation from heightened risk. To alleviate costs and administrative burdens, some firms —such as Bank of America, Commonwealth Capital, and Merrill Lynch —plan to avoid the added paperwork and litigation risk altogether by simply no longer allowing commissionable products.

2. If an advisor is going to take discretion over the account and take a commission, the exemption does not work.

The scope of the BIC exemption allows advisors to earn variable compensation (such as commissions) for non-discretionary advice. During the 2016 Vestmark Client Summit, Marcia Wagner recommended that advisors use written financial plans to ensure that their advice is in the best interest of the client. “Quality financial plans by their nature can help demonstrate prudent advice,” she said. If you are providing discretionary advice, the BIC does not work because you cannot accept variable compensation for a prohibited transaction.

3. Robo technology can help streamline efforts but integration should be top of mind.

Robo advisory technology can be used to reduce cost and to simplify new, complex audit processes required by the DoL. In addition, a robo is impartial and compliance records (i.e., best interest compliance documents) are all recorded. In the white paper, “The Integrated Platform: How Digital Technology is Reshaping the Wealth Management Landscape,” Will Trout, Senior Analyst at Celent said, “The cost and risk associated with managing IRAs and other retirement accounts under the DoL Fiduciary Rule will make it impractical for many brokers to maintain them. Transferring these accounts to trust or other advisory accounts will call for a significant amount of repapering and other document management processes.”

However, most robo offerings are stand-alone, bolt-on, ETF-wrap products that do not work alongside all other advisory programs, nor grow with the evolving needs of the investor. Consistent advice delivery requires a clear view of all assets, which implies eliminating product stacks and underlying technology silos through a consolidated platform that communicates across systems.

The DoL Fiduciary Rule will invariably increase the time and resources spent on compliance-related activity, expose firms to litigation from heightened risk and specific regulation permitting class action, and increase the service cost per client. These implications have resulted in a newfound urgency for automated advice platforms. Robo technology can enhance the investor experience and compliance efforts as follows:

  • Automate the entire investment process to scale across all accounts - small and large.
  • Prove the advisor acted in the best interest of the investor by recording all transactions for a complete audit trail.

For more information about Vestmark’s view on the Department of Labor Fiduciary Rule and how a fully integrated solution can help with compliance, watch our recorded webinar, “The Robo-Advice Solution: Creating a Fully-Integrated Platform,” featuring Celent and Brinker Capital.

By Mark Peabody, SVP of Product Management