Which advisors will find themselves best positioned after the fiduciary rule is formally announced? Those who have taken steps already and do so immediately in preparation.
Here's what my firm would recommend as a next step before the rule goes in effect. Because I have had this conversation so many times, I created the acronym BASE to keep me on track.
- B – Bone up on the rule. Understand who it affects and how. Understand the idea of the exemptions (BIC) and what it will take.
- A – Audit your book. Look at your last commission statement from your BD, custodian or Fund Company. Any qualified accounts, including IRAs? Any commission products inside those accounts?
- S – Segment those accounts. My suggestion is to create 3 buckets (or tabs, if you are using Excel).
- Tab 1: Clients you can and should move to an advice model (a fee model).
- Tab 2: "On hold" clients. These are accounts where there is a surrender charge or another reason that you wouldn't convert to fee. This is the tab where you are going to have to wait and see until the rule is in effect. But that doesn't mean don't talk to those clients until then.
- Tab 3: "To be orphaned" or "Give to the fund family or custodian" accounts. This third group is the hardest -- I have never recommended firing a client, but in this case, the accounts may be too small to be profitable and the risk is too high. We are going to have to find a solution for these guys and it may be an hourly rate or retainer that makes the account worth the advisors' time and effort.
- E – Educate and Execute. Educate your clients on the change and how it will affect them and your relationship. If you are already fee based on some accounts, educate those clients, too -- take credit for what they will be hearing about soon. Educate yourself on your options. Look for platform partners who can help you with presentations, scripts proposals and paperwork. If you have a platform partner and a plan, execute the transitions. Get in front of the conversation. Frame the change as a positive. Reinforce your value proposition in every conversation.
QUESTIONS, AND ANSWERS
A number of advisors have asked:
What are the chances that the rule is put on hold -- or that a new administration voids the rule early next year?
This will likely depend greatly on the terms of the final rule. If the Department of Labor adopts changes to the final rule that are palatable to financial service providers and their affiliated trade groups, then it would be unlikely that anyone would take the aggressive step of moving forward with any litigation. However, there are a number of parties who are preparing for the possibility that the department will ultimately fail to:
- Make the necessary changes to the proposal that would be required to make the rules workable
- Make the costs reasonable (in light of the benefits the changes are supposed to provide)
- Ensure that the law remains consistent with other bodies of law to which affected service providers are already living under
It's clear that the Labor Department is attempting to aggressively push this rulemaking to its conclusion, and still hopes to have as much of the rule implemented before any change of administration. From a practice management standpoint, it's is probably a good idea to prepare for the implementation of a final rule (as best you can), rather than wait for litigation, legislation or change of administration in the hope that the rule will be blocked, altered or otherwise stopped.
What will be considered reasonable fees and how would we charge?
We have always had the concept of "reasonable compensation" in ERISA accounts (going back to 1974). However, there isn't a lot of good guidance on what a "reasonable" fee is. We've always understood it to be "fair market value" -- that the price of the services is in the range of fees being charged in the marketplace for comparable services.
But there is something meaningfully different in this proposal. Under other guidance, the IRA account holder is accountable for making the determination of what a reasonable fee is -- which makes sense, since the IRA account holder is ultimately paying the fees.
That's not the case with respect to the Best Interest Contract exemption, which flips the burden to the advisor, and makes the advisor responsible for attesting that the fees charged are reasonable. This is one of the reasons why the BIC exemption may be unworkable for most advisors.
I've been told to wait until the rule is in effect so we can build an action plan based on how we are going to deal with communication and exemptions. What do you think?
I think that is bad advice. By waiting until the rule is in effect, advisors are losing a huge opportunity to frame the conversation with their clients. The conversation today can be calm and confident. The advisor can explain the benefits of continuing to work together, while restating his/her value proposition. By waiting, clients may be confused and uncomfortable if they hear anything about the rule from the media, their custodian or friends.
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