New Fiduciary Definition Demands Practical Suggestions

The opinions expressed below belong solely to the author of this post and do not necessarily reflect the opinions of eMoney or its affiliates. 

The wait is over. The OMB has released the Department of Labor’s(DOL) new fiduciary definition along with the promised exemptions. The new rules go into effect 60 days after publication but the DOL has given the industry one year before the rules are applicable and another eight months before all provisions of the exemption are complete. Without question, this new rule will affect every financial institution and advisor that sells and services retirement plans, IRAs and HSAs.

There will be a plethora of articles written on this topic over the coming months. Some will be negative and others positive; however, if I were an advisor I would focus my time on the articles that describe the practical application of the new rules to my practice. In other words, advisors are not interested in becoming an attorney, but they are interested in knowing what they must do under this new regime to comply and what it will cost them.

Suffice to say, it will cost advisors at least in time and the aggravation of understanding the new rules but to be more specific, if you are not an Investment Advisor Representative of a Registered Investment Advisor it is highly probable you will be sitting for your Series 65 or 66 in the near future if you want to remain relevant and competitive. My suggestion, do it now before it becomes impossible to set a date to take the exam. I suspect Prometrics is licking their chops at the prospects of thousands of advisors flooding their facilities to take the exam. Procrastination under these circumstances will only hurt you.

Another important suggestion to begin considering is your approach to justifying your compensation as reasonable. Like it or not, you are now a fiduciary under ERISA standards. As an ERISA fiduciary you must provide your client with the means to determine if your fees are reasonable for the services you render. This can be accomplished through three different processes including:

1. Request for Proposals (“RFP”),
2. Request for Information (“RFI”), or
3. Benchmarking

Unfortunately, there are no existing tools available to assist with determining reasonableness on IRAs, whereas there are existing solutions to assist with this endeavor for retirement plans. It seems reasonable to assume that advisors, in general, will prefer the low-cost time-efficient benchmarking approach over RFPs and RFIs, which encourage unwanted competition.

Furthermore, the ability to benchmark IRAs with relevance will be dependent upon a statistically significant universe of similar size IRAs. This is a chicken and egg dilemma because the first to enter their data into the system cannot use the benchmarking report since they are the only data point in the universe. Although, the DOL may not have thought of this issue, it is fortune that they delayed the applicability date so a database can be built.

Of course, it is somewhat Polly-Annish to think this database could be built in advance of the applicability date of April 2017. To do so would require advisors to be proactively entering their data manually into a new system to benchmark IRA fees assuming a system exists to accept such data. In addition, advisors will be faced with the time consuming task to enter that data manually for each of their IRA clients. Here again is an unanticipated cost of lost productivity that will affect every advisor. Without doubt advisors will demand automation but the logistics of connecting to every IRA provider that have been used by every advisor for any Broker-Dealer is highly improbable on a timely basis. The most likely outcome in phase 1 is manual entry which will cost advisors productive marketing time that cannot be avoided.

Another issue that may curtail the quick automation of data feeds to accommodate efficient benchmarking is the cost to build the bridge to import data automatically. Based on our internal analysis, we have determined the cost to be $30,000 to $35,000 per vendor. However, our competitors have proposed fees to vendors as high as $400,000 for the same integration process. As you would expect, vendors are hard pressed to spend any money on something that does not generate more business and advisors and the financial organizations they serve are unlikely to foot the bill. Hence, the dilemma becomes more complex because if the funding of the data feeds is borne by a technology firm, then the increased cost of the tool will be passed on to the advisor. Potentially making the tool cost prohibitive.

It has been our experience that advisors embrace time-sensitive solutions at the eleventh and a half hour which will create a bottleneck in the process that will result in an advisor failing compliance and engaging in a prohibitive transaction thereby risking the fees they receive. None of this is good news, but the cause and effect of the new rule must be addressed.