Impact of the DOL Rule on Brokerage and Advisory Business | American Funds

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Capital Group Policy Spotlight

August 09, 2016

Impact of the DOL Rule on Brokerage and Advisory Business

The final fiduciary rule impacts advisory business, but not nearly as much as it does traditional brokerage business. Being an ERISA fiduciary is really a new world, because of prohibited transaction rules that bar an advisor from working on a transaction where there’s any whiff of a conflict of interest.

Video

Featuring

Jason Bortz

Transcript

Jason Bortz: The new rule does impact advisory business. It doesn’t impact it nearly as much as traditional brokerage business. Advisory business is generally done on a level-fee basis, and registered investment advisors already comply with the fiduciary requirements of the Investment Advisers Act. Being an ERISA fiduciary is really a new world, because of these prohibited transaction rules that bar an advisor from working on a transaction where there’s any whiff of a conflict of interest.

The biggest impacts for registered investment advisors, for advisory programs, is going to be in the rollover process where advisors may need to tell participants that they’re better off staying in plan, even though the advisor may not be able to get compensated for in-plan advice.

They’re going to have to use the so-called level-fee exemption if they’re going to recommend rollover, so they’re going to have to contemporaneously document and decide whether staying in plan or rolling into an IRA, that the RIA, registered investment advisor, can work on, is in the best interests of the client. That’s going to be a new world, a lot of new friction that they haven’t dealt with.

The other thing the rule does is it makes the recommendation between advisory and brokerage — that type of business model recommendation — into a fiduciary act. So advisors may need to figure out how they recommend and how they deal with recommendations to clients to move from brokerage to advisory. And they may need to document why that’s the right thing to do.

The other thing they may do and the rule is less than clear on this, is some advisory platforms have multiple advisory solutions. They’ll have a rep as advisor, a rep-as-PM program. A home office discretionary model. The rule isn’t perfectly clear, but it seems to suggest that recommendations between those types of programs are now going to be fiduciary requirements, fiduciary recommendations. That’s a new world.

One of the surprises in the new rule that wasn’t at all in the proposal, wasn’t hinted at anywhere is this new idea that recommending that a client move out of their brokerage account into an advisory program is now fiduciary investment advice. And I think what the Department of Labor was concerned about was there are lots of investors today who are sitting in brokerage accounts who don’t trade very frequently, who may not be paying very much at all for ongoing service. In an A share mutual fund they’d just be bearing a 25 basis point cost, one-quarter of one percent for ongoing service. Labor was worried those folks might be moved systematically out of these brokerage accounts into more expensive fee-based programs that may not be quite right for those buy-and-hold investors who don’t trade very much.

The way they dealt with that was to make that recommendation into a fiduciary recommendation. They made the level-fee exemption available for that recommendation because you’d be moving to a level-fee advisory program there. But there is this requirement that it be a fiduciary recommendation and that they contemporaneously document why it’s right for that particular investor. It is a brand new requirement, and it is something of a surprise.



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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.