Discretionary Management, Rollovers and BICE
This is my 33rd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
Most broker-dealers and RIA firms are familiar with the provisions of the Best Interest Contract Exemption (BICE) and with the fact that, as a general rule, BICE applies only to non-discretionary investment advice. But, that isn’t the end of the story. There are some situations in which discretionary management can be used for recommendations that are covered by BICE. For example, if a representative of a broker dealer or an RIA prudently recommends a distribution and IRA rollover (satisfying the Level Fee Fiduciary conditions), the IRA may be invested using discretionary investment manager. (Note, though, that the discretionary investment management must be provided by a “pure” Level Fee … Read More »
Please join us for the nineteenth Inside the Beltway presentation, scheduled for January 26, 2017. This is the next session in an ongoing series of free audiocasts presented by Fred Reish and Brad Campbell, of Drinker Biddle & Reath, discussing developments in Washington that directly impact our industry. The presentation is sponsored by Natixis. Click on the linked title, above, to register.
During this session of Beltway we will discuss:
Update on the fiduciary rule
Update on the special Financial Institution status for IMOs and the sale of fixed indexed annuities
Impact of the Congressional proposals for retirement plans
Impact on retirement plans of other priorities of the Trump Administration
The audiocast will be recorded and available to all registrants within a week of the presentation. An Outlook appointment request will be sent with registration confirmation.
Questions? Please contact firstname.lastname@example.org.
What “Level Fee Fiduciary” Means for Rollover Advice
This is my 32nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
As explained in article #30 in the Angles series, in order to use the simplified, or BICE-lite, alternative for recommending that participants take distributions and roll over to IRAs with the adviser, the adviser must be a “Level Fee Fiduciary.” The Best Interest Contract Exemption (BICE) defines “Level Fee Fiduciary” as:
A Financial Institution and Adviser are ‘‘Level Fee Fiduciaries’’ if the only fee received by the Financial Institution, the Adviser and any Affiliate in connection with advisory or investment management services to the Plan or IRA assets is a Level Fee that is disclosed in advance to the Retirement Investor. A ‘‘Level … Read More »
“Un-levelizing” Level Fee Fiduciaries
This is my 31st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
In the last article I posted, I discussed the three meanings of “Level Fee Fiduciary.” This article discusses the kinds of payments or benefits that will “un-levelize” a Level Fee Fiduciary.
As a starting point, the definition of compensation, for these purposes, includes any money or things of monetary value. So, it covers both cash and non-cash amounts. However, as the DOL explains, it must be directly or indirectly connected to a recommendation:
The term ‘‘fee or other compensation, direct or indirect’’ means . . . any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee … Read More »
Three Kinds of Level Fee Fiduciaries . . . and What’s A “Level Fee?”
This is my 30th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
The DOL’s use of the phrase “Level Fee Fiduciary” is creating a lot of confusion about the application of the new fiduciary regulation and the Best Interest Contract Exemption (BICE). This article, and the next one, will try to dispel some of that confusion.
The label “Level Fee Fiduciary” has been used for many years for one meaning, but BICE has used it for a different purpose and, depending on your reading, a different definition.
Historically, Level Fee Fiduciary referred to a fiduciary adviser whose compensation was level or, at least, levelized. What’s the different between level and levelized? “Level” refers … Read More »
Capturing Rollovers: What Information is Needed?
This is my 29th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
The Department of Labor’s fiduciary regulation provides that a recommendation to take a distribution from a plan, and to roll the money over to an IRA, is a fiduciary act. As a result, the recommendation must be prudent and cannot result in a prohibited transaction. However, a prohibited transaction almost automatically occurs, since an adviser typically makes higher fees in the IRA than from the plan (even where the adviser is providing services to the plan). As a result, an exemption is needed, even if the recommendation is otherwise prudent. Fortunately, the Level Fee Fiduciary provision of the Best Interest Contract Exemption (BICE) provides the framework for … Read More »
One of the consequences of the presidential election is that the future of the fiduciary rule (and the exemptions) is uncertain. What does that mean to advisers . . . regardless of whether they are representatives of RIAs or broker-dealers, or for that matter, if they are independent insurance agents?
The answer is that nobody knows. However, this article outlines the most likely alternatives. Those are:
The rule will be killed by regulation or legislation.
The rule will be implemented “as is.”
The rule and the exemptions will be modified.
Only the second alternative (the “as is” option) could realistically be implemented by the current deadline of April 10. But, that’s the alternative that is, in my opinion, the least likely to happen. While it is low probability, it is high risk in the sense that broker-dealers and RIAs must be in compliance by April … Read More »
What About Rollovers that Aren’t Recommended?
This is my twenty-eighth article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions.
Under the DOL’s fiduciary regulation, the recommendation of a plan distribution and IRA rollover will be fiduciary advice, subject to the best interest standard of care and the prohibited transaction rules. But, what if a participant takes a distribution and rolls over into an IRA with an adviser . . . without a recommendation by the adviser?
As background, there are three ways that a participant can make a decision to take a distribution and roll over into an IRA. The first is “unsolicited.” In other words, the participant made the decision without any input from an adviser or recordkeeper. The second is “educated.” Distribution education involves providing … Read More »
Reasonable Compensation for IRAs: When and How Long?
This is my twenty-sixth article about interesting observations concerning the fiduciary rule and exemptions.
This article is a little different than most of my previous posts. However, it is equally as important. To get to the point, I am writing this article about reasonable compensation for advice to IRAs because of a common misunderstanding about the requirement.
In the last month or two, I have seen a number of articles and heard several comments to the effect that it will be difficult to determine reasonable compensation for IRAs because the rule is so new. Stated a little differently, the point is that the reasonable compensation requirement for IRAs will first become effective on April 10, 2017. That is not correct.
Section 4975(c)(1)(C) provides that the “furnishing of . . . services . . . between a … Read More »
Reasonable Compensation Versus Neutral Factors
This is my twenty-fifth article covering interesting observations about the fiduciary rule and exemptions.
In my last post, I wrote about the Best Interest Contract Exemption (BICE) and the requirements for “neutral factors” and “differential compensation” between “reasonably designed investment categories.” As I pointed out, the purpose of neutral factors is to determine the relationship of compensation between different categories of investments and services. In other words, neutral factors don’t establish a dollar amount of compensation, but instead they are used for determining the relative compensation between different reasonably designed investment categories. Think of it as evaluating degree of difficulty in terms of work, complexity, value, etc.
But that begs the question, if neutral factors are used to establish the ratio of compensation, how is the compensation determined?
The best way to approach that question is to look at … Read More »