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.

The proposal has no prohibited-transaction exemption for advisors with discretion over client assets, said Brian Graff, CEO of the ARA, which was formerly known as the American Society of Pension Professionals and Actuaries.

“So in effect, [RIAs are] prohibited from accepting rollovers under the current proposal,” Graff said.

Observers are hopeful that the DOL will fix the rule by clarifying that RIAs can use the BICE or by creating another exemption for RIAs.

The ARA has proposed a separate “levelized compensation advice” exemption for fee-based advisors.

Reish likes the idea of a separate exemption. “You then don’t have the volumes of disclosures [required with the BICE] that don’t have any application” to RIAs, he said.

“We don’t know for sure what the DOL will do,” the ARA’s Graff said, “but we’ve had good conversations with them and feel they recognize the need to address the issue. 

A final rule from the DOL is expected to come out in the first half of next year.