Financial advisors who charge more than their peers for products and services are in the greatest jeopardy under the concept of “reasonable compensation limits,” the compliance idea that the Department of Labor has brought to the forefront with its fiduciary rule.
But at the same time, the DOL didn’t create that idea. Reasonable compensation limits have been, in fact, already created by ERISA and IRS codes. And these won’t be undone by the DOL, the SEC or Finra rule-making, said Fred Reish, a partner with Drinker Biddle in Los Angeles and a leading expert on the DOL’s fiduciary rule.
“These limits are here to stay,” the veteran securities attorney said in an interview with Financial Advisor.
“Where we will see the most impact of these limits are on advisors who are outliers in terms of compensation,” Reish added.
“If you are an advisor, you will definitely have to think about what services you’re providing in order to justify what you charge. If you just want to just sell products and not offer service, you’ll have to charge less. If you’re an overpriced advisor, you’ll have to offer more services.”
For the bulk of typical advisors who are reasonably priced, their focus will be on creating a business model that underscores services.
“Not everyone will like this, but the rule will get rid of the outliers in terms of overpriced advisors. Investors will get more planning and advice,” Reish said.
The DOL fiduciary rule has been delayed until July 2019. The rule includes a delay of the requirement to get a best-interest contract exemption (or BICE) from clients, which takes into account the reasonable compensation standard, as well as a private right of action giving individual investors the right to file lawsuits or arbitration claims against their advisor for the first time.
But Reish says that because rules on reasonable compensation limits are already in effect under ERISA and the IRS code for qualified plans and IRAs (and have been for decades), the rule is essentially in effect today.
Not even a lawsuit like the one filed by the Financial Services Institute and SIFMA to vacate the DOL’s fiduciary rule can eliminate the reasonable compensation limits, Reish said. The lawsuit is currently pending in the U.S. Court of Appeals for the Fifth Circuit in Dallas.