Unless the Department of Labor makes changes to its pending fiduciary rule, fee-based RIAs could be subject to extensive new compliance requirements whenever they recommend IRA rollovers.
A little-known provision in the rule would capture RIAs under the DOL’s proposed best-interest contract exemption (BICE) if RIAs recommend a rollover and their fees are higher than the retirement plan’s.
The fact that RIAs charge higher fees to cover the extra cost of advice is immaterial.
Many fee-based advisors, because of their level fees, have assumed they would be unaffected by the DOL’s rulemaking.
But that’s not the case.
“If the RIA will make higher fees on that money in the IRA than in the plan, it is a conflict of interest and a prohibited transaction,” said ERISA lawyer Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles. “That means that the RIA will need to comply with the conditions of the best-interest contract exemption.”
In addition, RIAs who have revenue-sharing deals or get marketing allowances from product sponsors or custodians would also be subject to the BICE, said David Bellaire, general counsel at the Financial Services Institute.
And that means more compliance work for advisors.
The BICE “requires that the advisor sign a specific contract [with a client], and provide extensive point-of-sale, annual and website disclosures,” Bellaire said.
Although not the DOL’s intent, the American Retirement Association (ARA) thinks the rule could actually prohibit RIAs from handling rollovers.