The Department of Labor finalized new rules that expand the definition of a fiduciary to include many financial advisors. Under the new rules, advisors providing retirement advice for compensation will be subject to fiduciary standards, requiring them to act in their client's best interest. The rules impact brokers and advisors who were previously not considered fiduciaries. However, the Best Interest Contract Exemption allows advisors to continue receiving commissions if they adhere to impartial conduct standards designed to prevent conflicts of interest. The new rules go into effect on April 10, 2017 after being proposed in 2015 and finalized in 2016. The changes will have implications for how advisors structure their businesses and services.

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THE NEW FIDUCIARY RULE
September 23, 2016
Robert D. Kowalewski, MBA, AIF, CRPS
More advisors are now seen as fiduciaries.

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AGENDA
THE IMPACT
THE DEFINITION
THE IMPLICATIONS
THE NEED FOR EXEMPTION
THE BEST INTEREST CONTRACT EXEMPTION
THE ROLLOUT
CONCLUSIONS

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OVERVIEW
THE IMPACT
• Protects investors
• Requires those providing investment advice to abide by a fiduciary standard
– putting the client’s best interest before their own profits
• Fulfills the DOL’s mission to protect, educate, and empower investors as
they make decisions leading to retirement readiness
• Impacts many advisors who will be deemed fiduciary advisors for the first
time ever
The Department of Labor’s final fiduciary rule:

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THE DEFINITION (1 OF 2)
FIDUCIARY STATUS OF ADVISOR UNDER THE NEW RULE
PROVIDE INVESTMENT ADVICE TO RETIREMENT CLIENTS FOR COMPENSATION
HANDLE PLANS AND EVEN IRAs
ERISA fiduciary status is triggered if advisors:

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THE DEFINITION (2 OF 2)
FIDUCIARY STATUS OF ADVISOR UNDER THE NEW RULE
Investment advice definition broadly covers recommendations
relating to:
INVESTMENTS (like securities, other property)
INVESTMENT MANAGEMENT (like recommending investment strategies, advisors)
ADVISORS ACKNOWLEDGING THEY ARE ACTING AS FIDUCIARIES
ROLLOVERS (from plans, from IRAs)
THE RETIREMENT CLIENT’S OWN NEEDS
PARTICULAR INVESTMENT DECISION DIRECTED TO A SPECIFIC CLIENT

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THE IMPLICATIONS
FIDUCIARY STATUS IS EASILY TRIGGERED
The new fiduciary rule broadens the scope of fiduciary advice:
RETIREMENT CLIENT SIMPLY NEEDS TO RECEIVE ADVICE
INVESTMENT ADVICE CAN OCCUR JUST ONE TIME
BROKERS ARE NOT EXEMPT FROM BEING VIEWED AS FIDUCIARIES
ADVICE MAY ADDRESS A PARTICULAR INVESTMENT DECISION/NEED

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THE NEED
EXEMPTION FROM PROHIBITED TRANSACTION RULES
Prohibited transaction rules:
• Ban fiduciary advisors from earning variable compensation/commissions
• Flag advisors making recommendations and receiving commissions as
fiduciaries
• Require exemption from prohibited transaction rules for brokers, including
IRA advisors
• Posed a critical need for the DOL to release the Best Interest Contract (BIC)
exemption

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BIC EXEMPTION (1 OF 5)
BEST INTEREST CONTRACT (BIC) PROVIDES RELIEF
The purpose of the BIC exemption is to:
• Enable fiduciary advisors to earn variable compensation
• Provide ability for brokers serving as fiduciaries to have the ability to earn
commissions
• Cover fiduciary advice provided to IRAs, as well as retail plans with less
than $50 million in assets

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BIC EXEMPTION (2 OF 5)
BEST INTEREST CONTRACT (BIC) PROVIDES RELIEF
The Impartial Conduct Standards ensure that advisors:
• Give advice solely in the best interest of the retirement client
• Earn only reasonable compensation
• Provide no misleading statements to the client

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BIC EXEMPTION (3 OF 5)
BEST INTEREST CONTRACT (BIC) PROVIDES RELIEF
Different requirements apply for IRAs and sole proprietor plans:
• Written contracts must include fiduciary standards, as well as disclosures
for compensation and conflicts
• Transaction disclosures must be provided for recommended investments
that focus on fiduciary standards and advisor conflicts
• Web disclosures must be posted to a public website, focusing on the firm’s
business models and conflicts
• Specific compensation figures related to any recommended investment
must be provided upon client request
• Compliance policies must be adopted and address conflicts of interest

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BIC EXEMPTION (4 OF 5)
BEST INTEREST CONTRACT (BIC) PROVIDES RELIEF
For employer-sponsored plans:
• Written acknowledgements (not contracts) of fiduciary status must exist
• The other requirements that apply to IRAs and sole proprietor plans apply
here, too

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BIC EXEMPTION (5 OF 5)
BEST INTEREST CONTRACT (BIC) PROVIDES RELIEF
When level-fee fiduciaries (i.e., RIAs) offer rollover advice, the BIC
Exemption is critical.
• Conflict arises if the fiduciary advice triggers a rollover and additional
compensation for the advisor
• BIC Exemption offers relief for these types of conflicts, but rollover advice
must meet Impartial Conduct Standards
• Streamlined requirements include:
 Providing written statement of your fiduciary status
 Internally documenting your reasons why the rollover advice is in your
client’s best interest

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THE ROLLOUT
THE HISTORY & EFFECTIVE DATE
PROPOSED THE FIDUCIARY RULE ON APRIL 20, 2015
ANNOUNCED THE FINAL RULE ON APRIL 6, 2016
WILL MAKE THE RULE EFFECTIVE ON APRIL 10, 2017
FORMALLY PUBLISHED THE RULE ON APRIL 8, 2016
The Department of Labor:

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CONCLUSIONS
MOVING TO A UNIVERSAL STANDARD FOR FIDUCIARIES
FIDUCIARY STATUS IMPOSED ON ALL RETIREMENT ADVISOR TYPES
EARNING COMMISSIONS = HIGHER COMPLIANCE COSTS VIA BIC EXEMPTION
CLIENTS SHOULD ASK ADVISORS ABOUT IMPACT ON SERVICES & FEES
ADVISORS MAY NEED TO RE-EXAMINE THEIR CLIENT SERVICE MODELS
PLANNING AND EDUCATION CAN PREPARE ADVISORS FOR THESE CHANGES
PROFESSIONAL ERISA FIDUCIARIES CAN PROVIDE VALUABLE GUIDANCE

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