Fiduciary Rule ‘Going to Change the Game’

Calling it a “game changer,” NTSA Executive Director Chris DeGrassi and American Retirement Association CEO Brian Graff offered their takes on the Department of Labor’s proposed fiduciary rule in an Aug. 18 webcast, “The DOL Fiduciary Rule: What’s Next.”

Prospective Application, But…

One way the rule would have a major impact, DeGrassi said, is that although it would be prospective, it also “will affect millions of existing retirement accounts.” In addition, they pointed out, the rule will be easier to do than undo. This is because:

• the proposed rule will cover all future activity on all ERISA covered plans and individual retirement accounts;

• best practice will likely be to amend all existing contracts and agreements; and

• businesses will need to transition all business to new practices.

The Best Interest Standard

There is “almost unanimous agreement that there should be a best interest standard,” said DeGrassi, who added that at the hearings the DOL held Aug. 10-13, those who argued against the standard “did not make a compelling case.”

The best interest contract exemption (BICE) can be summarized as a proposed exemption for third-party compensation that establishes a process for continuing a commission-based advisory model. But they caution that and the risk and cost of compliance seem to far outweigh potential reward. “We have heard from the industry that the best interest contract exemption is not workable right now,” DeGrassi noted.

DeGrassi said that the following may be the results of implementing the BICE:

• we are likely to see brokerage firms consolidate due to increased operating costs;

• the outlook for proprietary products is still to be determined; and

• the emphasis on fees could cause a shift in models, including passive investing and use of robo-advisers.

Tick Tock

Now that the DOL has held the hearings, it is accepting a second round of public comments. But Graff is not sure the DOL will make many changes to the rule before it is promulgated. Said Graff, “They are saying that they expect to make substantial changes to the rule, but to be perfectly blunt, one wonders how they’re going to do it.”

Graff noted that there is not a lot of time for the DOL to make more revisions and issue another iteration and still issue the rule in final form in time before the end of the Obama administration. And he was skeptical that Capitol Hill will put the brakes on the rule. “No one, including me, expects Congress to intervene before this rule is finalized,” said Graff.

Get Ready

Graff and DeGrassi suggest taking the following steps to prepare for the rule:

• Everyone will be an ERISA fiduciary. Increase your knowledge now.

• Review your practice.

• Segment your client base.

• Map your revenue stream.

• Talk to your partners.

• Pay attention.

They suggest that advisors could consider making the following adjustments:

• head for safer harbors — migrate to all fee-based business;

• transition away from smaller, less profitable accounts; and

• charge an hourly rate for advice related to income products.

“It would be imprudent to assume this is going to go away,“ said Graff.

NTSA provides a wide range of information on the DOL’s proposed fiduciary rule; to access that and for a comprehensive compilation of NTSA coverage, click here.