David Levine, a principal with the Groom Law Group, Chartered, suggests six steps advisors should take now to start preparing for the final fiduciary rule.
1. Take time to breathe.
It will take time to get your business adjusted for the many changes that affect advisors, says Levine — including “level fee” advisors — but you still have a good bit of time.
2. Figure out what you personally are responsible for.
“As we work with broker-dealers, RIAs, and insurance agents, a key question we ask is, “Who is handling what part of compliance?” Says Levine. “If you are in the home office of a national organization, you may have ownership for the activities at both the home office and investment advisor representative and/or registered representative level. However, if you are an investment advisor representative or a registered representative, your main compliance organization may be pulling that oar and you won’t want to take steps that, at best, duplicate or, at worst, fail to line up with your centralized compliance organization’s approaches to compliance.”
3. Identify your key business activities.
If someone tells you, ‘It is easy to comply,’ it may just be too good to be true, Levine notes. So how do you go deep enough but not drive yourself crazy? Start with a list, he recommends. “Identify your key business activities and each step involved. For example, if you do rollovers, what do you do? Do you do recommendations to do rollovers? Do you recommend rollover vehicles? Do you recommend that you be hired to advise on investments in a rollover vehicle?”
4. Identify the legal compliance issues for each step.
“Among advisors who normally focus on FINRA requirements, there is a common belief that ‘disclosure shall set you free,” asserts Levine. “Alas, that is not the case in the land of ERISA and the new fiduciary rule. Legal compliance will often involve two basic questions: (1) am I fiduciary when I engage in this specific activity and (2) am I engaging in a prohibited transaction?”
5. Address potential prohibited transactions.
Disclosure and approval of its reasonableness by an unrelated third party under the rules of ERISA section 408(b)(2) makes most day-to-day compensation permissible. However, Levine notes, where the process becomes more complex is whether, regardless of the reasonableness of compensation, the activity is a prohibited transaction because you are using your role with respect to a plan or IRA to enrich yourself by recommending yourself for additional compensation when giving fiduciary advice. In this case, he says, “You’ll need to step carefully and decide whether you can use the Best Interest Contract (BIC) exemption, the level fee exemption or some other exemption strategy.” In short, just because something is good for a plan and comes with a reasonable cost, it doesn’t necessarily prevent a self-dealing prohibited transaction.
6. Be willing to adapt.
While these new rules are challenging, there are opportunities, Levine notes. “As the rules push industry players to focus on different market segments, there is already (and will be in the future) room for new value added services from advisors that help their clients. Being open to these changes can help an advisor evolve and flourish under the new rules.”
As advisors proceed, says Levine, “it is key to keep in mind that for everyone, it is going to be a marathon, not a sprint, to full implementation by the rule’s April 10, 2017 and Jan. 1, 2018 deadlines.”
Levine’s advice is in his regular “Inside the Law” column in the summer issue of NAPA Net the Magazine. That issue includes the cover story profiling the winner of the 2016 NAPA 401(k) Advisor Leadership Award, as well as feature articles on the DOL’s final fiduciary rule and a wrapup of this year’s NAPA 401(k) Summit in Nashville. The issue also features insights from regular contributors Jerry Bramlett, Steff Chalk, Nevin Adams, Warren Cormier, Brian Graff, Don Trone, Sam Brandwein, Fred Barstein and Lisa Schneider.
To view Levine’s column, click here and select “The Final Fiduciary Rule: 6 Action Steps in Plain English.” And to view a pdf of the full 64-page issue, click here.
