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Understanding the New Fiduciary Rules


In April, the Department of Labor released their final version of the new fiduciary rules for financial advisors who serve client’s retirement accounts. Many of you have probably heard or read about these new rules. We wanted to give you some insights into what these rules mean and our take on them.

The basics

The new rules mandate that financial advisors put the interests of their clients first when providing advice regarding retirement accounts such as IRAs and 401(k) plans. For advisors in the brokerage world this will be quite a change from the current suitability standard, which simply says that an investment recommendation needs to be suitable for someone in the client’s general situation.

Here are a few key elements of the new rules.

Timing

Implementation of these new rules is scheduled to start in April of 2017 with full implementation beginning on January 1, 2018.

Disclosure

One of the centerpieces of the new rules is the Best Interest Contract Exemption or BICE. This is a disclosure document that financial advisors must provide to clients if they will be recommending a product or service that is construed as a conflict of interest.

Here are a few examples of what might require a BICE agreement:

  • Proprietary products such as mutual funds offered via the financial advisor’s employer.
  • Annuities including variable, fixed and indexed annuities.
  • Commissioned arrangements in a client’s IRA.
  • Recommending a rollover from a 401(k) plan to an IRA if that rollover results in higher fees for the client.

Potential impact on clients

While it’s hard to say for sure what type of impact these rules will have for clients of financial advisors, here are a few potential areas where they will likely be impacted:

  • The cost of working with commissioned and fee-based (meaning a combination of fee and commission) advisors may increase in order to cover the cost of implementing the new rules.
  • Brokerage firms may decide that the cost of servicing smaller accounts is too high and either turn these clients away outright or provide them with a lower level of service.
  • To the extent that financial advisors take these new rules to heart, it may result in more use of low cost index mutual funds and ETFs which would be a good outcome.

Final version watered down

The final version of the rules seem to have been watered down a bit. For example, prior draft versions mandated that detailed expense projections be provided for investments covered by a BICE disclosure. This requirement was absent from the final version.

Proprietary mutual funds sold by some brokers were prohibited for retirement accounts in prior drafts, but are allowed in the final version, subject to proper disclosure.

Bay Point's take on the new rules

As most of you know, Bay Point has served our clients in a fiduciary capacity since the day we opened our doors, not only regarding your retirement accounts, but as the cornerstone of our relationship with you. We have long been advocates of greater disclosure and responsibility on the part of investment professionals through our involvement with organizations such as NAPFA (the largest professional organization of fee-only financial advisors) and the CFP Board.  

Although we have always served our clients as fiduciaries, this doesn’t mean that these new rules might not have an impact on the way we do business and on our valued clients.

We think that any impact will be minimal, but none-the-less, our compliance department will be reviewing the new rules in detail to determine if there are any changes that we need to make, or if there are any additional disclosures that we need to provide to you.

Conclusions

Here at Bay Point we feel the new legislation has shed light on the fact that many clients of financial advisors are currently getting advice that is NOT always in their best interest.  The new rules may help build awareness of this for many investors.  

Unfortunately, we feel these new rules don't go far enough to ensure that clients of commission and fee-based advisors will be well-served. The rules apply ONLY to retirement accounts and in some cases might actually result in higher costs or a lower level of service for clients.

As always if you have any questions about these new rules or anything regarding your situation please give us a call. We always want to ensure that you fully understand any new rules in our industry, as well as any communication that you have received from us now or in the future.