It’s five months since the Department of Labor finalized its fiduciary rule and only seven months until it takes effect in April 2017. The financial industry is buzzing with activity as broker-dealers, RIAs and certain insurance agents scramble to understand the implications and figure out how to comply.
On a parallel course, court challenges to the rule are proceeding apace. The first case got underway in federal district court in the District of Columbia in late August. Legal pros reading the tea leaves feel that Judge Randolph Moss is leaning toward upholding the regulation and away from granting the preliminary injunction being sought by the plaintiffs – the National Association of Fixed Annuities.
The most anticipated case – actually a consolidation of three cases with a total of nine plaintiffs – being brought in federal district court in Northern Texas, probably won’t get underway until as late as November. There won’t likely be an outcome until after the DOL rule goes into effect.
Investment professionals have recognized that they can’t wait about for court decisions, but rather must move forward with the assumption that the rule will stand. If it doesn’t they can wind back their efforts. But not too many experts are betting that it will go down to defeat.
As often happens in change moments like this, there are load complaints and hand-wringing in some quarters. However, in this instance firms large and small are assessing what life will be like in the new fiduciary environment. The smartest are busy hunting for opportunity.
To B-D or Not to B-D
One of the most interesting thought processes is related to whether plans would be better served by a fee-based RIA model, and which would continue to do better with a broker-dealer-esque commission model. For certain B-D’s, the “best interest contract” or BIC exemption allows otherwise “conflicted compensation” – read “commissions” — to be paid if the terms of the BIC exemption are met.
In an interview with BenefitsPro.com, attorney Joel Shapiro, senior vice president of ERISA compliance in the retirement division of NFP, the plan advisory division of insurance and benefits brokerage NFP Corp, said that he expected the rule to drive a lot of plan business from the broker-dealer model to the RIA side. But he doesn’t believe the $50 million and under market will become underserved.
Shapiro sees an evolving role for record keepers in determining the best model for small plans, citing Transamerica as an example. Record keeper to more than 25,000 defined contribution plans with over $152 billion in assets under administration, the company has an ERISA budget-type program in place for small plans. This may well keep advisers in the small plan market who would otherwise have shifted out.
The broker-dealer side of the equation is inspiring other kinds of services given their ability to trigger the rule’s BIC exemption. However, there are concerns that if outsourced plans are too multi-layered, they may add cost beyond their value. This remains, of course, to be seen – as so much DOL rule problem solving does.
Speaking of cost…
In a bottom-line-focused industry, companies are intensely scrutinizing the potential costs of complying with the new DOL rule.
During its Q2 earnings presentation in early August, Primerica, Inc. CFO Alison Rand said the company is planning for a one-time cash outlay of $8 million between now and the end of 2017 for consulting, legal guidance, sales force training and technology platforms over the course of the implementation period.
Primerica estimates that post-implementation, it will incur between $4- and $5 million in compliance costs. Costs will largely dependent on whether the company decides to develop, purchase or lease technology.
Which Brings Us to Compliance Technology
We are already speaking with firms who are concerned with how to don their new fiduciary mantle, monitor advisers’ client activity and stay on the good side of new and unfamiliar regulatory compliance requirements.
Companies of all sizes are inquiring about technology options with both cost and compliance in mind. The technology exists to automate fiduciary compliance to create efficiencies and mitigate risk.
The Portfolio Suitability module of our all-in-one compliance software is the answer for numbers of companies who have reached out to us for a solution. To help in the decision process, we consult with them on a cost-benefit analysis to help them determine whether implementing a cloud-based solution like ours will work best or whether they’ll do better developing their own.
We’ll be happy to help you explore your technology options for DOL fiduciary rule compliance automation.
Contact us for a complimentary consultative demo.