the impact of the new proposed dol fiduciary rule... · there are two primary pieces to the new dol...

The Impact of the New Proposed DOL Fiduciary Rule

2


The industry has been talking about a proposed Department of Labor (DOL) fiduciary rule change since 2010. This widely anticipated proposal is now a reality. The DOL has issued its proposed new fiduciary definition along with two prohibited transaction exemptions (and revisions to eight others) that, if finalized, will radically change the face of the fiduciary landscape. It is important to keep in mind, however, that until the regulatory process completely plays out, the industry must continue to operate under the existing rules.

The DOL’s current fiduciary rule on investment advice consists of a five-part test. Under this test, a person is considered a fiduciary if he or she:

1. renders investment advice for a fee,

2. on a regular basis;

3. pursuant to a mutual agreement or arrangement with the plan;

4. with the understanding that the advice will serve as a primary basis for investment decisions; and

5. is individualized to the plan or a participant.

ANALYSIS

Robert RafterERISA Attorney and President, RJR Consulting

Matt Sommer, CFP®, CPWA®, CFA®

Vice President, Janus Retirement Strategy Group

OUR PROFESSIONALS

3

July 2015

This rule has been in effect for more than 40 years. Currently the DOL must satisfy all five criteria to be able to find that someone is rendering investment advice. Thus the existing rule has continually frustrated the DOL’s enforcement efforts because it is very difficult to prove all five elements of the test.

Key DOL motivations in issuing this new rule change were to broaden both the scope and reach of the DOL’s enforcement efforts to include IRAs and protect transitioning participants, make the rule simpler to enforce and increase the DOL enforcement success rate. The new proposed rule states that providing advice no longer needs to be on a regular basis; rather rendering investment advice on one occasion is sufficient. Likewise the advice does not have to be the primary basis for decision making. It is sufficient that the advice is merely considered.

Old Rule Proposed New Rule

– Renders advice

– Regular basis

– Mutual agreement

– Primary basis

– Individualized

– Renders advice (buy/sell or distribution recommendation defined as a communication that could reasonably be viewed as a suggestion that the participant take or refrain from taking a particular course of action)

– One time is enough

– Agreement

– May be considered

– Individualized or specifically directed to a plan or a participant

These proposed changes will cast a much wider net and create uncertainty by potentially making it easier to find advisors and brokers, who believe they are acting in a pure sales or educational capacity, to actually run afoul of ERISA’s fiduciary responsibilities and prohibited transaction rules. The result will be that more brokers and advisors will inadvertently cross the invisible line between providing information and advice and find themselves characterized as “accidental fiduciaries” - a new category fraught with both new responsibilities and potential personal liability.

There are two primary pieces to the new DOL definition of a fiduciary puzzle: (1) the definition itself and (2) a contract-based prohibited transaction exemption for conflicted compensation arrangements.

4


1. Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice

• Sets a new best interest standard of care

• Expands the scope of “advice” to include distribution and IRA Rollover advice

• Reduces the threshold to meet the new revised five-part test for rendering investment advice

• Creates several “carve-outs” for things like education and sales to sophisticated plan sponsors. There is no seller’s carve-out for sales to small plans or retail clients so the financial advisor must comply with the Best Interest Contract (BIC) exemption. This exemption is not available for small participant-directed plans.

• Clearly states that conflicted compensation arrangements result in prohibited transactions. (Fee leveling will help but it may still be conflicted if the financial advisor can affect compensation by the consistency of the fund line-up. Fee leveling arrangements may still need to comply with the BIC exemption.)

• Conflicted compensation arrangements are those client relationships where a broker or an investment advisor is potentially being compensated to favor one thing over another (e.g. equity investments over fixed income investments or IRA Rollovers over leaving the money in the plan. Even level fee financial advisors may need the BIC exemption for advice to move assets from the plan to an IRA).

2 New Best Interest Contract exemption for conflicted compensation - The prohibited transactions resulting from conflicted compensation arrangements as defined in the DOL rule can be cured by complying with the conditions of the new contract-based exemption. The Firm, the financial advisor and the client will enter into a three-party contract under which the Firm and the advisor make written promises to:

✓ Act in the best interest of the client

✓ Have a written contract in place before making a recommendation to the client (may work with new clients but could prove unwieldy with existing clients)

✓ Provide significant point of sale and annual disclosures (must model total cost projections over 1, 5 & 10 years)

✓ Adhere to significant data retention requirements

✓ Ensure compensation will be reasonable

✓ Clearly and prominently disclose all conflicts of interest

✓ Institute processes and procedures by the Firm to mitigate conflicts of interest

✓ Ensure clients retain the right to join a class action lawsuit, although arbitration is still an acceptable way to resolve client disputes

5

July 2015

How We Got HereIt is important to realize that the new DOL rule is not a lone event but rather part of a larger general awakening among regulatory entities. The SEC and the DOL have been talking about fiduciary rule changes since 2010, the year Congress passed the Dodd Frank Act. Why have we suddenly seen a new urgency for the DOL to produce its fiduciary rule change?

At the same time that these statistics speak to the need and the business opportunity for investment advisory services, the numbers have also heightened regulatory interest in the IRA Rollover Market. The following important regulatory developments have taken place over the last 2 years:

• Governmental Accountability Office (GAO) Report

• FINRA Regulatory Notice 13-45

• SEC Examination Priorities and Dodd Frank Section 913

• Obama AARP Speech

• Office of Management and Budget (OMB) Proposal Release

• New DOL Fiduciary Rule

GAO Report“There is concern that [401(k)] participants may be encouraged to choose rollovers to IRAs in lieu of options that could be more in their interests.” You can find highlights of the March 7, 2013 GAO 13-30 report to Congressional Requesters at http://www.gao.gov/products/GAO-13.30. This report clearly identifies the following issues:

• “Steering” by 401(k) providers

• Pervasive marketing and participant confusion

• Distribution processing inefficiencies that impede plan-to-plan rollovers

As a result, the report to Congress also contained a number of calls to action:

• DOL to seek additional statutory authority if necessary to regulate rollover sales disclosures

• DOL to finalize the definition of fiduciary regulatory initiative and require better disclosure of distribution assistance conflicts

• IRS to standardize distribution processes to better facilitate plan-to-plan rollovers

Consider the statistics which give some perspective on the IRA Rollover market size and opportunity as of a year ago:

• Total IRA assets: $7.2 trillion

• Total 401(k) assets: $5.3 trillion

• Traditional pensions: $3.10 trillionu

6


FINRA Regulatory Notice 13-45Regulatory Notice 13-45 reminds brokers and their Firms of their obligations with respect to distribution counseling and IRA rollover decisions:

• Recommendation concerning the type of retirement account in which a customer should hold his or her retirement investments typically involves a securities recommendation. This includes:

1. Sell recommendations from existing plan 2. Purchase recommendations for new IRA

The FINRA Notice also spoke to the marketing of IRAs and associated services, including other communications with the public.

• “Whether in written sales material or an oral marketing campaign it would be false and misleading to imply that a retiree’s only choice, or only formal choice, is to roll over her plan assets to an IRA.”

• Firms must ensure that registered representatives who recommend IRA rollovers are properly trained concerning tax, investment and other implications of the rollover decision.

• Firms should emphasize that performance of a firm’s or a registered representative’s suitability responsibilities should never be compromised by their own financial interests in recommending an IRA rollover.

SEC 2014 Examination Priorities“The staff will undertake several initiatives, including:

1. examining the sales practices of investment advisers targeting retirement-age workers to roll over their employer-sponsored 401(k) plan into higher cost investments, including whether advisers are misrepresenting their credentials or the benefits and features of individual retirement account (“IRA”) plans or other alternatives, and

2. examining broker-dealers and investment advisers for possible improper or misleading marketing and advertising, conflicts, suitability, churning, and the use of potentially misleading professional designations when recommending the movement of assets from a retirement plan to an IRA rollover account in connection with a customer’s or client’s change of employment.”

Dodd Frank Section 913 The SEC is separately considering a new universal fiduciary standard of care for Brokers and registered investment advisers. The Dodd Frank Wall Street Reform and Consumer Protection Act gave the SEC the authority to institute a higher standard of care for brokers. Congress instructed the SEC to conduct a study, the results of which were presented to Congress in January of 2011. The SEC staff study recommended that the SEC implement a universal standard of care for brokers and registered investment advisers. Mary Jo White, the Chair of the SEC, has announced that the SEC will begin to consider making a change to the broker standard of care subjecting the broker to a best interest standard of care similar to the rule that applies to a registered investment advisor today. The SEC is still in the very early stages of this process.

7

July 2015

Obama AARP Speech – February 23, 2015President Obama encouraged the DOL to press forward with its rule change: “Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.” – President Barack Obama, February 23, 2015

Office of Management and Budget (OMB) Proposal ReleaseLess than two months after the DOL submitted its fiduciary rule for review, the OMB publicly released the DOL proposal. The proposal review process was expedited by OMB after President Barack Obama publicly supported the DOL’s efforts in his AARP speech on February 23, 2015.

New DOL Fiduciary RuleLess than a week later on April 20, 2015, the DOL formally published its new rule in Federal Register (115 pages) along with a new accompanying prohibited transaction exemption, a new principal transaction exemption and a myriad of revisions to eight existing prohibited transaction exemptions.

1. Definition of the Term “Fiduciary”; Conflict of Interest Rule – Retirement Investment Advice - Individuals providing fiduciary investment advice to employer-based plan sponsors and plan participants are required to act impartially and provide advice that is in their clients’ best interest.

2. New Prohibited Transaction - Under ERISA and the Internal Revenue Code, individuals providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners are not permitted to receive payments creating conflicts of interest without a prohibited transaction exemption (PTE).

3. Distribution and Rollover Advice - This new definition, among other things, expands the definition of fiduciary advice to include distribution/rollover advice. At the same time, the proposed rule creates a new “broad, contract-based PTE,” as well as several “carve-outs” for non-fiduciary activities like providing participant education.

4. Prohibited Transaction Exemption/ Proposed Best Interest Contract Exemption - This will allow firms to continue to set their own compensation practices so long as they, among other things, contractually commit to putting their client’s best interests first in a written contract and agree to disclose any conflicts of interest. (Firms and financial advisors may also be able to take advantage of other exemptions where available.)

5. Proposed Best Interest Contract - To qualify for the new best interest contract exemption, the company and the individual adviser providing retirement investment advice must enter into a contract with its clients that:

• Commits to a best interest standard requiring the adviser and the company to act with the care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances.

• Warrants that the firm has adopted policies and procedures designed to actively mitigate conflicts of interest. Specifically, the firm warrants that it has identified material conflicts of interest and compensation structures that would encourage individual advisers to make recommendations that are not in clients’ best interests and has adopted measures to mitigate any harmful impact on clients from those conflicts of interest.

• Clearly and prominently discloses any conflicts of interest. The contracts must also direct the customer to a webpage clearly disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information about the fees charged.

8


Carve-OutsIn addition to the exemption, the DOL Proposed Rules also include the following carve-outs from the definition of investment advice:

• Plan counterparties (Seller’s Carve-Out). Recommendations provided with respect to an ERISA plan with 100 or more participants or at least $100 million in assets by a counterparty acting in an arm’s length transaction. No Seller’s Carve-Out is available for sales to retail clients or small plans. The BIC exemption is not available for small participant-directed plans.

• Platform providers. Marketing or making available to participant-directed ERISA plans a platform of investment alternatives.

• Investment Education. Providing information and materials that constitute “investment education” or “retirement education” (such as asset allocation models). However, asset allocation models that include specific investment products will no longer qualify for the exclusion from investment advice (this is a change from the current rules under DOL IB 96-1).

• Selection and monitoring assistance. Providing an ERISA plan with investment alternatives that meet objective criteria specified by the plan fiduciary or otherwise providing objective financial data and benchmark comparisons.

• Swap and security-based swap Counterparties. Offers or recommendations to plan fiduciaries to enter into a swap or security-based swap that is regulated by the Securities Exchange Act or the Commodity Exchange Act.

• Employees of an employer. Statements or recommendations given by an employee of a plan sponsor to the plan fiduciary in the course of his or her employment (as long as no additional compensation is paid).

• Financial reports and valuations. Providing appraisals and valuations to employee stock ownership plans (“ESOPs”) regarding employer securities or collective investment funds holding “plan assets” to ERISA plans and IRAs for purposes of complying with certain reporting and disclosure requirements.

Timing is EverythingThese new rules will not take effect for at least several months if not longer:

• The new fiduciary framework that the DOL released on April 14, along with carve-outs, two new class exemptions and amendments to eight other existing prohibited transaction exemptions (PTEs) are proposed, not final. Until they are finalized, the industry must continue to operate under the existing rules governing fiduciaries providing investment advice.

• The next steps for the DOL’s proposals are:

– Formal publication in the Federal Register - This occurred on April 20, 2015.

– An initial public comment period (now 90 days) – This period has begun and has been extended beyond the original 75 day period announced at the time the regulation was issued. With the extension, the comment period will now end on July 21, 2015.

– A public hearing will occur within 30 days of the close of the comment period. (It is rumored that the DOL is tentatively targeting the week of August 10.)

– Another comment period following the publication of the transcript for the hearing.

9

July 2015

– DOL reviews comments and testimony and revises the proposed rule.

– DOL sends the revised rule to OMB.

– OMB releases the final rule.

– DOL publishes the final rule in the Federal Register.

– A delayed effective date occurs 60 days from date of final publication. (The DOL will absolutely want this regulation to be effective before a new Administration takes office in 2017.)

– A delayed application date occurs eight months from the date of final publication. (The delayed application date may give Firms and financial advisors more flexibility in dealing with some of the practical business issues created by the rule change.)

• In the interim, the industry must continue to operate under the existing rules including the current five-part test.

As Phyllis Borzi, who heads the DOL’s Employee Benefits Security Administration, observed: “So it’s a very long and open public process. We need to keep in mind that this rule change will not happen overnight.”

Practical Considerations Is this as some would have us believe a clear case of how you see the world – is the glass half empty or half full? Will the Firms and their retirement plan brokers and advisors embrace this new highly regulated fiduciary environment or resist it? Irrespective on your current view, all retirement advisors and brokers will need to assess the impact of these new rules on their business models in regards to:

• Consultants

• Educators

• Distribution and IRA Rollover Advisory Services

• 3(21) Advising Fiduciaries

• 3(38) Discretionary Fiduciaries

• Accidental Fiduciaries

• Specialist Programs

Consultant

Many brokers and investment advisors have chosen to play the role of an independent consultant with plan sponsors and their fiduciary committees. They have carefully constructed their business model to avoid being found to be rendering investment advice under the DOL’s current five-part test. They neither render advice on a regular basis nor do they intend their consulting services to be the primary basis for decision making.

The new DOL rule will make it much more difficult for these consultants to remain in the information end of the information/advice continuum. A broker or an investment advisor acting as pure consultant to date will find themselves characterized as an accidental fiduciary under the new DOL rule because their counsel amounts to advice on even a single occasion even if is merely considered by the fiduciary decision-makers.

10


Educator - Plan Distribution and IRA Rollover Specialists

Many brokers and investment advisors have also chosen the role of an educator for transitioning plan participants. They have once again chosen to carefully remain in the information end of the information/advice spectrum. Currently they can successfully escape fiduciary status because to date these services were never covered by the existing 3(21) fiduciary definition.

Furthermore, even if these services occasionally amounted to rendering advice, the advice was never rendered on a regular basis and their counsel was not meant to be the primary basis for decision-making.

Two existing Department of Labor (DOL) rulings have provided guidance and safe harbors on how to keep clear of rendering investment advice regarding distributions and IRA Rollovers:

• Interpretive Bulletin 96-1 – Under IB 96-1, the DOL set forth its guidelines for determining the line between information and advice. This bulletin allows a series of educational activities that will not give rise to rendering investment advice.

• Advisory Opinion 2005-23A – Under Advisory Opinion 2005-23A, the DOL gives guidance on what an Advisor can do if:

– already acting in the role of a fiduciary for a plan

– not already acting in the role of a fiduciary for a plan

If finalized, the new DOL rule will supersede and do away with Advisory Opinion 2005-23A. It will likewise change and incorporate much of Interpretive Bulletin 96-1. Under IB 96-1 (IB), an Advisor can provide a litany of services to participants or beneficiaries that currently do not cross the investment advice threshold. The interpretive bulletin sets forth, in effect, a series of safe harbors under ERISA for plan sponsors, service providers and advisors. The IB defines four specific categories of investment information and materials:

1. Plan Information - information and materials that inform a participant or beneficiary about the benefits of plan participation and increasing plan contributions, the impact of preretirement withdrawals on the participant’s ultimate retirement income, the terms and operation of the plan, and information on the plan’s investment alternatives; descriptions of investment objectives and strategies, philosophies, risk and return characteristics, historical return information, or prospectuses.

2. General Financial and Investment Information - information and materials that inform a participant or beneficiary about general financial and investment concepts, such as risk and return, diversification, dollar cost averaging, compounded return, and tax deferred investment; historic differences in rates of return between different asset classes based on standard market indices; effects of inflation; estimating future retirement income needs; determining investment time horizons; and assessing risk tolerance.

3. Asset Allocation Models - information and materials that are made available to all participants or beneficiaries - in the form of pie charts, graphs, or case studies - with hypothetical asset allocation portfolio models with different time horizons and risk profiles.

4. Interactive Investment Materials - questionnaires, worksheets, software, interactive websites and similar materials that give participants or beneficiaries the ability to estimate future retirement income needs in light of different asset allocation choices.

a

11

July 2015

These safe harbors are designed to ensure that participants and beneficiaries will have the information they need to make their own, informed asset allocation decisions. Under IB 96-1, the DOL clarified that the safe harbor for interactive investment materials would continue to be available even if the asset allocation models generated by the materials take into account a participant’s or beneficiary’s broader non-plan assets, income and investments.

The primary objective of the Bulletin was to draw a distinction between investment education and investment advice. Hence IB 96-1 focuses on educational activities relating to investment decision-making. According to the Bulletin, whether providing particular investment-related information or materials to a participant or beneficiary constitutes the rendering of “investment advice” is a facts-and- circumstances test determined by looking at the facts and circumstances of the particular individual plan participant or beneficiary.

Recommendations as to the Distribution Plan Assets

The new DOL rule considerably broadens the scope of the facts and circumstances that amount to rendering investment advice and gives rise to fiduciary status. The newly proposed regulation, if finalized, would supersede Advisory Opinion 2005-23A. Thus, recommendations to take distributions or to invest plan or IRA assets would fall within the scope of covered advice under the newly proposed DOL rule.

At the same time, the rule clearly states that one does not become a fiduciary merely by providing participants with information about plan or IRA distribution options, including the consequences associated with the available types of benefit distributions. The new DOL proposal continues to draw an important distinction between fiduciary investment advice and non-fiduciary investment information and educational materials.

The DOL’s proposed rule incorporates much of IB 96-1 and expands the concepts to include educating IRA owners. The DOL will also formally remove the Interpretive Bulletin from the Federal Register.

From the DOL perspective, because participants generally have taken illustrations that reference specific investments as gospel, the DOL now views asset allocation models which refer to specific investment products available under the plan or IRA as rendering investment advice even when accompanied by a disclosure statement as to the availability of other investment alternatives. The DOL views these types of illustrations as tailored, individualized investment recommendations that can effectively steer recipients to particular investments, lacking adequate protections against potential abuse. In other words, under the new rule, this kind of recommendation is characterized as advice and the broker or investment advisor will be a fiduciary under the new DOL rule. Will participants make good asset allocation decisions in the absence of references to specific investments?

12


The Impact of the New DOL Fiduciary Rule on Distribution and IRA Rollover Advisory Services

To begin, the new rule clearly makes distribution and IRA Rollover advice a fiduciary act subject to the ERISA fiduciary rules. When a broker or investment advisor is receiving conflicted compensation, providing advice is immediately a prohibited transaction unless the Firm and the broker/advisor comply with the new Best Interest Contract exemption requiring the Firm and the broker/advisor to commit to many conditions and disclosures as well as act in the best interests of the client at all times. Other exemptions and/or carve-outs may also be available.

Again the new rule will characterize many brokers/advisors/educators as “accidental fiduciaries” because advice regarding plan distributions and rollovers are now squarely within the scope of the DOL’s new definition of fiduciary. It will be sufficient that this advice and counsel is offered on a single occasion and that it is merely considered by the transitioning participant. The DOL has expanded the reach of the rule and made it much easier for a broker or an advisor acting as an educator to be found to be rendering investment advice as a fiduciary.

Plan distribution and IRA Rollover business affects almost every broker and investment advisor. We are no longer talking about just the few brokers and investment advisors who are actively doing business with retirement plan sponsors. The extended scope of the new DOL fiduciary rule will now apply to all brokers and investment advisors who do IRA Rollover business. This creates a much larger problem for the Firms. It is not a matter of training an elite group of broker/advisors to be able to service a sophisticated plan sponsor market in this new environment. It is a matter of creating new policies and procedures for every broker and investment advisor at the Firm.

Open Questions

? Will the Firms allow all brokers and investment advisors to provide distribution and IRA Rollover investment advice to transitioning participants and existing clients?

? Will the Firms develop Distribution and IRA Rollover Specialist Groups specially trained to provide fiduciary investment advice to transitioning participants and existing clients as they have for the retirement plan market itself?

? Will the Firms embrace the new business model based on the DOL Best Interest Contract (BIC) Exemption for the brokers and investment advisors specializing in the Distribution and IRA Rollover market?

? Will the Firms find compliance with this new BIC exemption too onerous? Will the disclosure and systems changes to implement policies and procedures needed to monitor and mitigate conflicts of interest make this Distribution and IRA Rollover business virtually unmanageable? Will the litigation risk associated with doing this business under this new BIC exemption be unquantifiable and unmanageable? Will point-of-sale client contracts and disclosures prove unworkable?

? Will the Firms begin to transition all brokers and advisors providing Distribution and IRA Rollover investment advice to a new level fee-for-service business model that eliminates conflicts of interest and does not need the BIC exemption? Will the Firms limit the products and services that brokers and investment advisors can use with these clients?

13

July 2015

3(21) Advisory Fiduciary

Many investment advisors are currently acting as ERISA Section 3(21) advising fiduciaries. They have been careful to structure their business models very intentionally. They have leveled their compensation, eliminated conflicts of interest, clearly shown intent to render investment advice and acknowledged in a written contract that they are acting as a fiduciary under 3(21) of ERISA. This new DOL rule change should not impact these investment advisors.

3(38) Discretionary Fiduciary

Virtually no brokers act as ERISA 3(38) discretionary fiduciaries because their Firms will not allow this. Many investment advisors have taken on this discretionary role over the last several years because there is a need for this service in the marketplace and these services provide a clear way to differentiate against the competition.

An investment advisor has intentionally taken on this role to manage all or a portion of the plan’s assets on a discretionary basis. They have entered into a written agreement to perform these fiduciary services and clearly acknowledge their fiduciary status along with representations about the scope of services, standard of care, conflicts of interest and a level fee-for-service compensation agreement. This new DOL rule change should not impact these investment advisors.

Accidental Fiduciary

Many of the large broker dealers have Retirement Plan Specialist programs for credentialed brokers and investment advisors. These professionals have the knowledge, experience and expertise that clearly set them apart from brokers and advisors who occasionally do retirement plan business.

The new DOL rules pose a danger that the broker or advisor who casually does retirement plan business will run afoul of the new DOL rule and be found characterized as a fiduciary rendering investment advice for a fee. Responsibility and potential liability flows from this new “accidental fiduciary” status.

As a result, many brokers and advisors may step back from occasionally doing retirement plan business and instead choose to partner with the credentialed brokers and investment advisors who are part of these Specialist Programs.

Retirement Plan Specialist Programs

Retirement Plan Specialists will find new opportunities to partner with less experienced brokers and investment advisors who want neither the responsibility nor the potential liability of being found to be a fiduciary under the new DOL fiduciary framework. The new rule creates a definite opportunity for the Retirement Plan Specialist. The large BDs know that even if an advisor can win the business on their own, perhaps due to a key relationship with a CEO or CFO, he or she may not be able to service the business effectively. The risk is that service failures will injure the reputations of both the advisor and the firm.

14


What is the new value proposition?Every broker and investment advisor doing business with Retirement Plan Sponsors has created a detailed value proposition for plan level services and, in many cases, participant level services. The question will always be: Do any of these services cross the invisible line between providing information and advice? Under the existing fiduciary definition, brokers, investment advisors and consultants can, and do, successfully avoid fiduciary status by carefully constructing their business models to avoid rendering advice on a regular basis or as the primary basis for decision making under the existing DOL 5-part test.

As we have discussed, it will be much more difficult to finesse the definition of investment advice under the newly proposed DOL fiduciary framework. One of the stated purposes for the new rule is to increase DOL enforcement success. Every broker and investment advisor doing any form of retirement business will need to reassess their value proposition in light of the new DOL definition of a fiduciary along with the accompanying Best Interest Contract prohibited transaction exemption described above.

Preliminary Observations

Regardless of the role that the financial advisor chooses for the future, the common theme will be intention. All retirement plan brokers and advisors will need to become very intentional about all of their client interactions. The Chinese word for crisis means both danger and opportunity.

The DOL has created a new highly regulated environment in which retirement plan brokers and advisors will conduct business in the future. The DOL has expanded the scope of the fiduciary rule to encompass IRAs, and IRA Rollover/distribution advice. All retirement plan brokers and advisors must reassess their business models in light of this very important change. Although it is possible to take a wait and see approach, most retirement plan brokers and advisors will want to analyze and anticipate the possible consequences of these rule changes.

Many brokers and advisors will choose to educate their clients about their new value propositions. This could also be a “prevent defense” to possible increased competition from other retirement plan brokers and advisors who suddenly see this new DOL rule as a reason to market their newfound identities as fiduciaries under the DOL Best Interest Contract exemption.

15

July 2015

Will this DOL rule change be seen as a reason to apply the brakes to the retirement plan business or will this change present new opportunities to both develop and reposition a revised stronger retirement plan value proposition? Regardless in which camp a Firm finds itself, all will agree that it is truly a brand new fiduciary world.

Open Questions

? Will the Firms embrace this Best Interest Contract?

? Will the many retirement plan brokers and advisors who have not been able to use the word “fiduciary” in developing and keeping retirement plan business suddenly find themselves empowered to use the word freely and be able to tell clients that they will be a fiduciary in a written contract with full transparency of fees and any potential conflicts of interest?

? Will compliance with the Fiduciary Rule and the Best Interest Contract (BIC) exemption prove to be unworkable?

? What is the cost of compliance?

? Will some Firms view this new fiduciary Best Interest Contractual relationship as a way to level the playing field and allow their retirement plan brokers and advisors to demonstrate a much stronger value proposition that competes directly with those who have chosen traditional 3(21) or 3(38) fiduciary status?

? What would it mean to a client if the retirement plan brokers and advisors could now offer not only a highly competitive value proposition but also a Best Interest fiduciary contract along with the depth of their organization’s resources and its balance sheet?

? Will other Firms find that the BIC contract, taken together with the disclosure and conflict mitigation requirements, would create the real possibility for a highly litigious business model where the associated risks are unquantifiable and unmanageable?

? Will the firms move retirement plan and IRA business to fee - based programs that eliminate the need for the BIC prohibited transaction exemption?

The information contained herein is provided for informational purposes only and should not be construed as legal or tax advice. Federal and state tax laws and

regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the

applicability, accuracy or completeness of the information contained in this document. Janus does not have information related to and does not review verify your

business practice, structure or services offered. Janus is not liable for your use of, or any tax position taken in reliance on such information.

The opinions expressed are as of January 2015 and are subject to change at any time due to changes in regulatory, legal, market and/or economic conditions.

The comments should not be construed as a recommendation but as an illustration of broader themes.

FOR INSTITUTIONAL INVESTOR USE ONLY/NOT FOR PUBLIC VIEWING OR DISTRIBUTION

Janus is a registered trademark of Janus International Holding LLC. © Janus International Holding LLC.

C-0715-91539 07-30-16 166-15-30889 06-15

the impact of the new proposed dol fiduciary rule... · there are two primary pieces to the new dol...

Documents