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Industry Preps for DOL Fiduciary Rule

Less than a year till zero hour on the Department of Labor’s (DOL) fiduciary rule. And while it is imminent but not formally implemented just yet, it’s already having an effect — and panel discussions at the June 20-21 SPARK National Conference in Washington, DC offered insights into the effects it’s already having and how the retirement industry can prepare in the less than 10 months remaining before the effective date.

The regulatory environment — including the DOL rule — are among the market forces Shelli VanDeMark Kendig and Jody Meth, both practice directors at the Bridgepoint Group, identified as accelerating the pace of disruption for the industry. Julian Regan, vice president and principal at The Marco Consulting Group, struck a similar theme, noting, “There are parts of the DC market where the effect might be significant.”

That goes for consultants, too. “It requires us to double down” to make sure we are meeting the standard, said Regan. Ben Taylor, VP and DC consultant for Callan’s Fund Sponsor Consulting Group, said that they are “very concerned about what it is, and if fiduciary status will be triggered.”

Not to mention advisors, who increasingly consider themselves to be fiduciaries, according to data presented by Ron Bush of Brightwork Partners, LLC. He reported that his firm found this year that 81% of advisors think of themselves as being fiduciaries — a 20 percentage point jump in just five years.

One of the bottom lines is that now there is much more to consider than before the rule was issued. Panelists pointed out that the fiduciary standard under the rule is different from the suitability requirements under FINRA and what advisors currently are required to do. “It’s not just about investments. Now it’s also about distributions and how distributions of client assets are done,” said DST Compliance Services’ managing director Rich Hochman. And for the most part, he said, that involves IRA funds from rollovers. “That’s why the DOL is interested in IRAs,” he told attendees.

Validating Hochman’s observations regarding IRAs, Taylor said that his firm’s focus includes how to do IRA rollouts.

The rule appears to already be affecting advisor compensation, as well. Bush reports that Brightwork data show a sharp increase in the percentage of advisors whose compensation is mainly fee-based, and a corresponding drop in the percentage whose compensation is mainly commission-based:

Mainly Fee-Based
2005: 24%
2015: 59%
2016: 63%

Mainly Commission-Based
2005: 61%
2015: 29%
2016: 21%

And this trend is not finished, indicated Bush, who told attendees, “I imagine this will increase quite a bit with the implementation of the DOL rule.”

The rule also is affecting what advisors expect from broker-dealers, according to Bush, who said that “a lot of it is about data” and that the broker-dealers are “still trying to get their arms around what it means — what data we need, and in what time frame.” And the sooner they can do that, the better — Bush said he expects that advisors are going to look to their broker-dealers “for a lot of support.”


Time and tide wait for no man, it is said, and apparently neither does the DOL. “They’re telling us to turn around on a dime” in order to get ready to comply with the rule by April 2017, said Hochman. Kendig and Meth made a similar observation, saying that the “implementation timeframes are seen as extremely aggressive” and that very few firms are at the stage of executing with confidence, although they are “facing pressure to quickly get there.”

Once it is in force, Hochman warned, the DOL says it will be interpreting the rule very narrowly. But enforcement may not be performed only the DOL itself, he added, remarking that Labor Secretary Tom Perez is “looking for plaintiffs to be enforcement vehicles.”

Getting Ready

Kendig and Meth argued that there is an “evolving DOL maturity curve” and that its stages are as follows:

  • understanding the regulation from a legal perspective;

  • assessing the rule’s implications;

  • making strategic decisions;

  • finalizing implementation plans; and

  • executing with confidence.

They contend that much of the industry is now at the stage of making strategic decisions. “Many of your peers in this room are having these strategic conversations” right now, said Meth. They said that stage seems to be entailing:

  • firms starting to move to a more fine-tuned consideration of how to comply;

  • many firms are asking what their peers are doing without sufficient thinking about the best path forward;

  • senior management teams starting to align around strategic decisions;

  • executive teams balancing offensive vs. defensive positioning; and

  • opportunities for competitive leadership relative to acceptable risk levels.

As for finalizing implementation plans, Kendig and Meth have seen some firms “jumping to implement without making strategic decisions.” They add that “firms are making similar mistakes as they did with prior legislation — approaching too narrowly.”

“Be very careful. What you thought is education may be construed by a third party as advice,” said Hochman. That is the central question to consider — the determination of whether or not one has made a recommendation and whether a reasonable third party determines that one has.

Hochman suggested that attendees take steps to protect themselves. “If it would be helpful in proving you’re not a fiduciary to document what you’re doing, do it,” he said. Chris Robino, an ERISA attorney with Boston Financial, struck a similar note. “Document transactions that could be taken as conflict of interest,” he suggested.

Further actions that could help a firm be better prepared for April 10, 2017 include:

  • determining if the firm is a fiduciary under the final regulation;

  • deciding if the firm — or individual operator — wants to be a fiduciary;

  • if the answer to the question of whether one wants to be a fiduciary is “yes,” then decide what compensation models should be used, and whether the best interest contract (BIC) exemption is needed;

  • training advisors regarding the best interest and impartial conduct standards;

  • documenting material conflicts of interest;

  • auditing investor-facing materials to make sure they are not misleading;

  • hiring or naming a compliance professional responsible for addressing and monitoring adherence with the best interest and impartial conduct standards; and

  • updating or developing new documentation and record retention procedures.

Muriel Knapp, Principal at Mercer, said they are “working with plan sponsors to do a deeper dive,” adding that “it’s going to take a lot more work with the advisor community.”