“You have to address it head on,” he said. “One way is to utilize a BIC exemption. Another way is by eliminating the conflict of varied compensation by levelizing the fees.”
Within the BIC exemption, he explained, the DOL has created a narrow carve-out for something called the level fee fiduciary exemption. “To the extent a firm could qualify for that, it’s another path forward less than the full BIC, or what we call a BIC Lite. To utilize that, a firm has to do three different things.”
First, a firm must provide a written disclosure to the investor acknowledging that the firm and the advisor are fiduciaries. Second, the firm agrees to comply with the impartial conduct standard. And third, the firm must document internally when they move a 401(k) or a brokerage account into a levelized fee account and why that’s in a customer’s best interest.
“To the extent that firms can utilize the level fee fiduciary exemption, it might be a better path forward than relying of a full best interest contract exemption because there aren’t as many things you need to do as you would under a full best interest contract”, such as not having to provide a written contract to the investor, Wachtel said.
While charging level fees is one way to do business in the post-DOL world, it raises questions of how to mesh, say, different mutual fund share classes and the different fees they charge.
“We wouldn’t be changing the actual payments from the fund companies,” Gordon said. “Pershing would look across the different funds to group together funds that pay the same commissions. It’s not necessarily about the share class, it’s about what they’re paying according to their prospectus and we would group those together and then try to put some rules around that so an advisor can’t buy a fund that has a different compensation structure so it stays within a levelized fee account.”
Gordon added that broker-dealers could initiate their own fee-leveling programs by looking at their own investments and what their advisors are selling.
One of the longstanding beefs the broker-dealer industry has had with the DOL regulations is that they will raise compliance costs and make it unprofitable to serve clients with small retirement accounts, potentially stranding Main Street investors with no access to professional advice on those accounts.
Gordon said Pershing plans to build small-balance wrap accounts to accommodate low-balance investors to help ensure that their broker-dealer clients can still profitably serve this audience.
She added that Pershing is also boosting the digital tools on its platforms to make it more efficient for advisors to do business, and is rethinking how it can streamline the onboarding and consolidation of new accounts that don’t have as much transparency in their product mix.
One of the basic takeaways from the panel discussion was that the commission business model isn’t dead.
“At Pershing, our platform's book of business is just shy of 50 percent being advisory business,” Partnow said. “Forward-thinking advisory firms are approaching the 80 percent advisory/20 percent commission mark. On average, it’s maybe about 60 percent advisory.