Myth No. 5: As long as a client signs a BIC, the advisor will not be held to a fiduciary standard.
Not exactly. According to AssetMark, the BIC exemption permits advisors to offer products that may compensate them differentially through commissions, but they are still fiduciaries under the BIC and subject to the rule’s impartial conduct and best interest requirements.
“Advisors are going to have to think carefully about their product recommendations to make sure they’re complying with the BIC,” Matrisian says. “They’re required to attest that the product is in a client’s best interest, that they’ve reviewed other available products, and that they’re still recommending the product. They’re still required to disclose any conflicts of interest. Any failure to disclose and act in the client’s best interest opens up the advisor or firm up to litigation for breaching the BIC.”
Myth No. 6: The DOL rule’s grandfathering allows advisors to receive compensation indefinitely for conflicted investments.
Per the DOL’s rulemaking, advisors can “grandfather” in existing investments in variable compensation products that pay them in the form of trailing fees or commissions -- meaning that a firm or advisor can continue to receive their compensation even though the investments require a BIC in the new rule. However, any future advice by the advisor relating to the grandfathered assets will need to comply with the ERISA fiduciary standard.
“Grandfathering is a grey area because according to the DOL’s language, it’s only effective until further advice is provided to the client concerning their investments,” Matrisian says. “When the rule goes into effect, advisors will have to put these clients on notice that potential conflicts exist and advisors are going to continue to receive the third-party or differential compensation. The next conversation they have with that client, even if they’re advising the client to ‘stay in the products they’re currently in,’ will require a BIC to be put into place in order for those clients to continue to hold those investments.”
Myth No. 7 The BIC exemption doesn’t apply until Jan. 1, 2018.
In response to concerns from the financial industry, the DOL adopted a phased implementation for the BIC exemption that run through Jan. 1, 2018, but that doesn’t exempt advisors from conforming with the fiduciary standard for all assets using the BIC as of April 10, 2017.
“From our understanding, clients will have to sign off on the BIC as of Jan. 1, 2018,” Matrisian says. “The fiduciary standard itself kicks in on April 10, 2017. At that point, if advisors want to put clients on notice from a grandfathering perspective, they’ll need to be postmarked, by that date and advisors will be bound by the best interest rules on that date. My guess is that most firms, especially broker-dealers, will try to have their rules in place in April 2017 and will try to force compliance to eliminate the grey area.”