Independent registered advisory organizations — fiduciaries before the Obama-era Labor Department expanded the definition of fiduciary advice — are predicted to see a surge in demand under the conflict-of-interest rule, according to most industry insiders and independent analysts.
While they won’t be exposed to the rule’s more onerous contractual requirements, RIAs are not completely off the hook in complying with rule, according to a client alert from attorneys at Drinker Biddle.
In fact, come 11:59 p.m. EDT this Friday, the end of day on June 9, when all regulated entities will have to begin operating under the rule’s impartial conduct standards, even advisors long beholden to a fiduciary standard will be affected.
In one sense, the impartial conduct standards encapsulate the intent and spirit of the fiduciary rule without applying all of its red tape.
Under the requirement, advisors on qualified retirement accounts and plans will have to give advice that is in clients’ best interest, only receive reasonable fees or compensation, and be prohibited from making misleading statements.
But in another sense, the standards create new oversight and documentation requirements and potential new liability, even for those advisors that were previously regulated as fiduciaries, according to a Drinker Biddle client alert that lays out the June 9th’s implications for non-affiliated RIA firms.
For financial organizations advising 401(k) sponsors and plan participants, not too much will change, the alert says.
But advice on plan distributions or rollovers to IRAs will “usually result in a prohibited transaction because the RIA will receive additional compensation,” says the alert, which was co-authored by Fred Reish.
In such cases, RIAs will have to rely on a new prohibited transaction exemption—the so-called Transition BICE, a streamlined version of the rule’s Best Interest Contract Exemption.
In order to satisfy the best interest requirement under the impartial conduct standards, advisors will have to consider “all relevant factors” for justifying a recommendation to rollover assets, including comparing investments and fees between the sponsored plans and IRAs.
Technically, a full comparative analysis is not required under the rule until January 2018.
But Reish and his team recommend RIAs take a more proactive approach to monitoring and documenting advice on rollovers. While the Labor Department has indicated more than once that it will not be pursuing enforcement against firms making a good faith effort to comply with the rule during the transition period, plaintiffs’ attorneys are under no such obligation.
“Although not required until January 1, 2018, we recommend that RIAs follow the basic process required under BICE Lite to document why the rollover is in the investor’s best interest,” the alert says. “Firms should consider developing written materials to assist IARs in making these determinations, and maintaining that documentation.”
IRA-to-IRA transfers and advice on managing investments
RIAs will also have to abide by the impartial conduct standards when recommending a client move IRA assets from one firm to their own, as it would result in new compensation for the advisor. The alert says the process for justifying when the recommendation is in the client’s best interest will be similar to the process used for plan-to-IRA rollovers.
RIAs will also engage in a prohibited transaction when they charge different fees on different investment products. When an RIA applies full discretion in managing assets and allocating investments, they will have to use the full BIC Exemption in order to assure the impartial conduct standards are satisfied, the alert says.
The alert also recommends third-party benchmarking services to assure fees satisfy reasonable compensation requirements.
If an RIA merely recommends an investment strategy, and leaves the ultimate management decisions to clients, then financial organizations can apply the less stringent Transition BICE.
One way to sidestep entanglements with any version of the BIC Exemption is to level fees across asset classes by charging a blended fee, the alert says.
For advice on IRAs, that strategy would avoid a prohibited transaction, meaning the impartial conduct standards will not apply. “However, the RIA will still be subject to the fiduciary obligations under the Advisers Act,” the alert says.
Originally published on BenefitsPro. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
