Certain US investment advisors now have to obey three or four very basic provisions that went into effect on 9th June in the Department of Labour’s Fiduciary Rule. This promises to be an expensive, low-margin, labour-intensive business, with litigation possible throughout the process.

The first and foremost of the provisions is the fact that if they are covered by the term 'fiduciary' under the rules and are therefore providing advice related to the relevant retirement accounts, they are expected to adhere to the ‘impartial conduct standards’ found in the rule. Although the exemptions, including the 'best interest contract' exemption, have technically been postponed until 1 January of next year, if such an advisor has a conflict of interest related to either proprietary products, forms of compensation, limitations of access to products that he offers to his clients or other things, he ought to be disclosing those conflicts to his clients now and keeping records of his disclosures.

Other provisions of the rule dictate that the 401(k) rollover (the process of transferring one’s existing retirement account into another one while avoiding unnecessary taxes or withdrawal penalties, often into an individual retirement account or IRA, perhaps a brokerage IRA) fee analysis and disclosure are required and plan advisors will have to show that they have changed non-compliant compensation plans by 9 June.

The DOL has said that it is not going to enforce the rule punitively in the case of advisors that are making real efforts to comply. Sarah Simoneaux, a retirement industry consultant, spoke to Compliance Matters about the advent of the Fiduciary Rule. She harked back to the Reagan years when she was a TPA, drawing parallels with the present-day situation because it was the last time when the United States faced comprehensive tax reform. She painted a picture of tumult.

“I had 1,000 plans on the book, 800 of which were defined benefit plans because those were the plans of choice for small businesses, largely because of the limits that they had and the way people could structure them. We terminated over 800 plans after Reagan's tax cut and that was because they used the cut in the limits in changes to retirement plans to pay for the income tax cut and we are facing potentially some of that today, particularly in the small pan arena and we'll talk about that.”

A matter of capacity

Now that their country is shifting to a fiduciary model, many US fiduciary specialists are wondering whether they will have enough capacity to take on these plans. The Fiduciary Rule is already causing retirement plans to change, particularly in the mid-size to larger sector.

Jared Faltys, a certified plan fiduciary advisor and partner at Retirement Plan Consultants LLC, told Compliance Matters that the media was doing a good job of marketing for fiduciaries, many of whom seemed to be experiencing a large increase in plan intake and plan activity. Faltys said that his firm had seen a 20% increase in its book of business merely in the first quarter of this year. His firm had been adding to its staff and he thought that any firm that was new to the fiduciary game ought to be taking on new staff.

“We are in a thin profit margin business, we all know that, but ultimately these are great annuity plays. Plans like these can last for years and years as part of your book of business, so watch out. If you're working with a specialist, do they have capacity? If you choose to be a fiduciary and a specialist, are you going to have capacity?”

Broker-dealers doing a good job

Sarah Simoneaux was very supportive of the work that America’s broker-dealers had put into compliance with the rule.

“They've taken on this project despite regulatory uncertainty and worked extremely hard to try to come up with models that make sense for their particular advisor and broker base. Every broker-dealer is different and it's frankly because of their culture. They want to make sure that their culture fits in with the Fiduciary Rule.

“So if you are affiliated with a broker-dealer and you want to be a fiduciary and you want to work with a retirement plan, I would hope that you've checked with their models and what they would like you to do. Everyone has a different approach but some of the things we're seeing are maybe a limit on the recordkeepers you can work with, and if you have a recordkeeper you work with that's not on the approved list you may want to talk to your folks in the retirement plan sector, in compliance, about getting that recordkeeper on the list. It's a way for broker-dealers to control the flow of information, which I think is a very valuable tool for those of you who want to comply with the rule and continue in retirement plans.

“Know what the broker-dealers are doing and if you are working with broker-dealers, I would get familiar with what their approach is because that's already in play. They've already put a ton of money and time into it and frankly I think most of them have done a great job.”

Benchmarking

Advisors throughout the US are in need of software to help them prove, in line with the rule, that they are charging ‘reasonable’ fees. This compels them to look for sources of information for comparison. Software vendors such as Orion Advisor Services and Fiduciary Benchmarks offer fee benchmarking programmes that allow advisors to compare their accounts’ fees against countless other managed accounts.

Faltys said that he had been hearing the word 'benchmarking' for the last handful of years and had seen a rapid increase in the need for it, especially with the advent of fee disclosures and rules to do with them.

Looking at the big pension plans which occupy the $10m+ bracket, otherwise known as the large market, Faltys said that benchmarking was de rigeur. He thought, however, that the smaller plans, hovering below that $10m market, did not typically have investment committees but were nonetheless starting to see the importance of benchmarking and keeping documents about their positions from a fees schedule standpoint. All this, he said, was causing a large increase in benchmarking.

RFPs

Sarah Simoneaux thought that requests for proposals or RFPs were important: “I think with the RFPs...remember that ERISA [the Employee Retirement Income Security Act 1974] does not require a plan sponsor or an investment committee to go out to an RFP to look at their advisor or their service provider. However, it has become a 'best practice' and actually the DOL does audits looking for this type of thing. I would say be very proactive with your RFPs, particularly in the new benchmarking fiduciary world.

“If your client has been with you for more than three to five years and they haven't done an RFP, I would suggest one. If you're good at what you do, you will be in that mix and continue to get the business and it also shows a best fiduciary practice. It's tough to do, because you don't want to risk losing the business, but if you're providing value and really working well with the sponsor and the committee, you're going to come out on top on that RFP so I would get ahead of any RFP process and take a look at your book of business and see who you've had for a considerable period of time – anything after five years probably – and see what you should do with them.

IRA rollovers

IRAs are a big area of activity for both advisors and broker-dealers as well. Sarah Simoneaux thought that this was going to be a labour-intensive process: “What are we going to do with the IRA rollovers? They come out of plans. If you’re a fiduciary to a plan, can you be a fiduciary to an IRA? What can you charge in the IRA versus the plan? That's going to require a lot more paperwork and a lot more disclosure.”

Jared Faltys agreed: “There's no problem doing it but just like you alluded, documentation's the biggest thing, so if you are rolling from a plan that mischarges so many basis points, you roll it to an IRA that's charging more basis points, are you documenting the services that you're doing that justify that increase in basis points? It's all about documentation.”

Sarah Simoneaux agreed that the keeping of documents was vital. Looking at other trends, she thought that is was worthwhile following NAPA [the National Assoc of Pension Advisors at napa-net.org], where she had just read two articles about new share classes that comply with the fiduciary regulations: “They’re the new generation of our share classes. They're calling them T share classes. We’re also seeing a lot more fee-based models. I think that that's the direction we're moving in. If you want to see what it looks like if there is no 12B-1, [an annual marketing or distribution fee on a mutual fund] no revenue sharing, no commission-based products, take a look at Australia and the United Kingdom. Both of those countries said ‘no more revenue-sharing 12B-1s.’ It was a real boon, frankly, to the fee-charging advisors and service providers. Their fees actually went up but you can take a look and see – Google it and see what it looks like.”

Both Sarah Simoneaux and Jared Faltys agreed that litigation was, unfortunately, going to be one of the driving forces behind compliance with the Fiduciary Rule. Sarah Simoneaux thought that benchmarking, combined with the IRP (individual retirement plan) process was going to help fiduciaries innoculate themselves and their plans against that continuing litigation.