The bank channel seems to have collectively breathed a sigh of relief after the new fiduciary rule was passed, but there are still more questions than answers. That was the main takeaway from our recent Retirement Income Leadership Forum. I have to wonder, though, just how justified that sigh of relief is.
Regulatory pressure on fiduciary behavior will likely continue to ratchet up, especially given the fact that the SEC Chairwoman Mary Jo White has repeatedly said such a rule is a top priority for the commission. Also, media pressure and public sentiment will likely also push this agenda forward.
Moreover, as reported in the press, the threat of litigation – which exists because the rule provides clients with the right to legal action – as well as the stiff disclosure requirements regarding fees, could push some firms to change business models and spur some advisors to exit the business.
Indeed, it seems that since the DOL hasn’t been able to increase resources to police the rule, and its solution is to provide more power to the people and allow clients to sue firms for breach of fiduciary duty and also to launch class action lawsuits.
The Best Interest Contract
The feeling at our meeting was akin to the first day of the season for a new sports team. You're not quite sure of the rules or how strict the referees will be. Given that uncertainty, it's not surprising that many of the questions during the discussions were basic, such as: how do you document client’s best interests, and what should BIC exemption contracts look like and will the DoL provide a template? (The DoL has indeed provided the framework for the best interest contract, which can be found here.)
It seems that, at least initially, banks are willing to base at least some of their business on the BIC exemption, regardless of the fact that it opens them up for greater liability. Time will tell whether this is a viable strategy.
Compensation is a major challenging aspect of all this issue. According to the DoL, “the exemption neither bans all conflicted compensation, nor permits financial institutions and advisers to act on their conflicts of interest to the detriment of the retirement investors they serve as fiduciaries." In other words, the DOL is giving the industry enough rope to hang itself.
One interesting related question that surfaced during the roundtable discussions is whether accepting “soft” marketing dollars from product partners is acceptable. While that may still remain an open question at least one national bank at the forum was of the opinion that accepting these marketing dollars will no longer be acceptable. Hello, Holiday Inn award trips!
And what about existing VA contracts if client responds to negative consent BIC exemption letters? Should that client be moved out of the VA even if the costs and ramifications of doing so may be not in the client’s best interests? Does that set up a Catch 22?
The future will involve a heightened degree of fiduciary responsibility for our channel. Reliance on the BIC exemption will most likely be a transition tactic, but not a long-term strategy. It is very likely that more financial planning will be a significant part of the response, as well as robo advice.
Accordingly, there was not a single bank represented at the forum who is not currently in discussions with white label robo advice providers. Clearly, banks see lower cost automated advice as an advantageous way to provide an additional DOL-compliant distribution channel for appropriate segments of their client base.
The future also will involve more strategically tiered solutions where mass market is self-service, mid-market is a blended offering (online, phone, limited live), and affluent market is high touch with technology assisted management and monitoring.