What the DOL rule and the President’s Friday memorandum means to you and your clients

Washington D.C has been giving us some flashy headlines over the past few weeks; it’s almost head spinning. However, the news that has peaked our interest the most? The recent DOL rule memorandum, signed by President Trump, February 3, 2017.

While media banners are running the gambit; from mainstream news channels reporting ‘Trump delays rule giving savers greater protections’ to the financial industry media’s more celebratory titles ‘Trump delays DOL fiduciary rule by 180 days’. Regardless of what media source you or your clients are pinned to, you are likely to hear the question: What is the DOL rule and what does it mean to me?

The DOL fiduciary rule proposal: The DOL rule, originally proposed in 2010 was set for a phased in implementation beginning April 10, 2017. With over a 1,000 pages of text, the DOL rule is comprised primarily of three parts. Requirements for commission levelized compensation, best interest contract exemptions (or BIC contracts) and discretionary advisory business. The basis for this rule was to require that advisors working with retirement accounts are offering a fiduciary level standard to their clients.

Commissioned levelized compensation: The first component of the DOL proposed rule would require that if a retirement account transaction occurred as a commissioned financial transaction, that compensation be paid to the advisor on a levelized basis. Specifically, that each pre-defined investment category (example: variable annuities) must have the same compensation level across the industry. This element also limits compensation in the form of sales conferences.

Best Interest of Client exemptions: Within the proposed rule, it offers an exemption clause called the Best Interest contract (BIC). The BIC is an extensive contract with the client that outlines the investment choices of the client, the fiduciary roles and responsibilities of the financial advisor and a list of steps that the financial advisor will take to mitigate conflicts of interest.

Discretionary Advisory Business: By nature, discretionary advisory business is levelized already. However, the proposed rule would significantly limit any variances to client fees based upon requested service level. Additionally, any changes would need to be extensively documented.

The Ideal vs. the reality: On the surface the DOL rule seems dandy. It would require that all of us in the financial world act in the best interest of our clients. It would seemingly create more transparency in the industry and everyone would skip, hold hands while we would all have well managed retirement accounts for a low cost.

Now as a person who worked in Washington D.C. for many years I will often will say to my family and friends “If you want to ruin a great idea, add a bureaucrat.” And honestly, that is exactly what happened with this rule. On the surface it seems fine, but in reality it’s not so pretty.

For instance, in the example of the BIC contracts, the rule text communicates that while the exemption contract will allow for traditional compensation, the transaction would in fact be considered “conflicted” and therefor under ERISA, the transaction would be prohibited unless the financial institution agreed to post on a public website; annual, five and ten year projections, fees, expenses and other relevant information for every product the advisor has the option to offer.

The reality of this aspect of the rule is: the cost for gathering and posting that information will create such a burden that the financial industry and investment firms will inevitably have to reduce the number of options available for their clients to choose from. In fact, many of the independent broker dealer firms are estimating cost for this to be in the billions across the industry.

Further, as the compensation amount must be levelized and therefore often reduced, advisors will likely need to increase the minimum account size of households that they can afford to work with, which will leave millions of middle class families in the U.S. without the ability to gain financial advice for their retirement accounts.

The current lay of the land: In a published draft of the memorandum the President sent to the Department of Labor, Friday; it was mandated that the DOL examine the Fiduciary duty rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice. Further, as part of the investigation, the Department must prepare an updated economic and legal analysis concerning the likely impact of the Fiduciary Rule. Click here for the full text of President Trump’s memo.

So, in a nutshell, what did the President’s memorandum offer? It is requiring that the U.S. government carefully examine the full impact of the plan rather than blindly creating a rule that will negatively impact the financial futures of all Americans. As President Trump said as he signed the order, ‘It doesn’t get any better than that’.

Paige Fraga
Director of Advisor Advocacy & Recruiting

Download our compliance-approved client letter discussing how the advisor-client relationship won’t be impacted by the DOL rule. (DOCX file)

Leave a Comment