By Kathleen Beichert
Among the uncertainties facing advisors in 2017 is the fate of the Department of Labor’s Fiduciary Advice Rule under the administration of President-elect Donald Trump.
Will the Rule be scrapped? Watered down? Replaced? If so, when and with what?
Of course, no one can say for sure what will happen. The conventional wisdom is there will almost certainly be a delay in the Rule’s applicability date, currently set for April 10, 2017, and a meaningful delay at that. I hope so.
That being said, I believe that when it comes to some aspects of the Rule, there’s no turning back. Much work has been done and much money spent to build out compliance protocols. Along the way, our collective thinking has changed about certain aspects of how we work with our clients.
For example, with or without the Rule, commissions will be consistent and level across similar investment types, and they will be lower. Most firms have been working to define “reasonable compensation” in the context of their product sets and mix of business. Those that will continue to offer commission-based accounts have settled on a mutual fund structure with a sales charge significantly lower than current rates. There have been public filings and press coverage. The bottom line, in my view, is the lower commission toothpaste is not going back in the tube.
Adjusting to Lower Fees
Now, as a practical matter, if all or some of your business is commission-based, you’ll want to consider the impact of reduced sales charges on your practice. Your firm may require smaller accounts to be serviced via a self-directed or digital advice platform, but even somewhat larger accounts may no longer be worth your while.
The level of personal service associated with IRA rollover decisions and investment recommendations is high—even without the Rule-mandated Best Interest Contract and documentation requirements—and an advisory solution is not always appropriate. You’ll need to evaluate the types of accounts and relationships that make financial sense based on your time and resource commitments.
New Thinking on Rollover Decisions
The Rule’s inclusion of IRA recommendations in the definition of ERISA investment advice has fostered discussions about the benefits to participants of remaining invested in their employer-sponsored plan after separating from service. Both employers and participants have mixed attitudes about “stay in the plan,” which makes for a tricky dynamic. Retirement advisors should take advantage of this shift-in-thinking opportunity to discuss with their plan-sponsor clients the friendliness of their 401(k) plans to participants who do not take a lump sum distribution. Important questions include:
- Does the plan allow for partial withdrawals or systematic payments?
- How costly are these transactions?
- Is the plan’s target date fund glide path in sync with participant stay-or-go behavior?
Enhanced Due Diligence
The risk of litigation has prompted many firms to pare down the universe of investments on their platforms to better allow for more rigorous due diligence and monitoring, with the ultimate goal of tying every advisor investment recommendation to a prudent and documented investment decision process. Retirement plan advisors and RIAs who already embrace fiduciary status have deep expertise in developing and monitoring investment policy with their plan clients.
Refining investment platform offerings to facilitate more meaningful, active review is a welcome best practice.
Round Out Your Service Offering
If you are only recently active in working with retirement plans, or have a smaller retirement practice relative to your wealth management business, your firm may require you to employ an in-house or third-party fiduciary service, or to team up with a more seasoned advisor with ERISA expertise. This points to a number of considerations and opportunities if you, like many of us, have a passion for working with plan sponsors and participants and want to continue.
If your value proposition has been your investment acumen, and a discretionary or non-discretionary fiduciary will be mandated, now is the time to explore ways to round out your service offering. For example:
- Shore up your knowledge about behavioral finance–influenced plan design and investment menu construction.
- Consider custom approaches to target-date and target-risk funds or participant-friendly white-label options.
- Explore financial wellness programs.
Similarly, if you are teamed with a retirement plan veteran, take the opportunity to improve your knowledge and unleash your inner ERISA geek. There are several high-quality stewardship and governance programs that will change the way you present yourself and help your clients. Work toward an accreditation or certification. The best interest bar is high—opportunity abounds for plan specialists with deep and well-rounded retirement plans expertise, with or without the fiduciary advice rule.
Despite the uncertainty about whether the Rule will be fully implemented on schedule and as written, advisors should embrace fiduciary tenets and adjust their business to the new paradigm.
Kathleen Beichert is Head of Retirement and Third Party Distribution at OppenheimerFunds.