DOL fiduciary rule update What it means and how it impacts advisors

Transcription

1 DOL fiduciary rule update What it means and how it impacts advisors April 28, 2016 For broker/dealer use only. Not to be used with the public.

2 DoL publishes final fiduciary rule April 6, 2016 Unpacking what it means for Voya and its advisors

3 Key points DoL rule better but still challenging Rule affects your business if you provide advice on qualified assets or rollovers (including HSAs) Indexed annuities now under BIC Exemption Advice to smaller plans now under BIC Exemption Effective June; compliance with Best Interest/Reasonable Comp April 10, 2017 (Applicability Date), disclosure/all other provisions January 1,

4 What changed? Indexed annuities no longer covered by PTE 84-24; now BIC BIC contract at time of execution; can be incorporated in other docs BIC Exemption disclosures eased, not easy BIC Level Fee Exemption or BIC Lite Advice to small retirement plan sponsors can now be provided under BIC Exemption Alternative assets (e.g., non-traded REITS) no longer excluded from BIC exemption Providing the FINRA four options (stay in plan, roll over, roll to new plan, liquidate) without more is not advice 4

5 What did not change; more difficult? Liabilities under BIC Exemption No practical way to provide discretionary management to retirement accounts, including IRAs, unless you have no conflicts If you provide advice to an existing account, that account will need to be repapered Advice on HSA investments is under the rule BIC agreement can be executed electronically but not via telephone Advice includes recommending account type (advisory, direct, brokerage) Education for IRA investors cannot include examples of available funds in various asset classes 5

6 Effective dates Rule is effective June 10, 2016, but Compliance date is April 10, 2017 (Applicability Date) BIC transition period between April 10, 2017, and January 1, 2018, during which relief will be available under fewer conditions 6

7 Effective dates During transition can receive compensation for providing investment advice if: Comply with the impartial conduct standards in making investment recommendations Provide a written notice acknowledging fiduciary status, that you will comply with impartial conduct standards, and describe material conflicts of interest Disclose whether the financial institution recommends proprietary products or investments that generate third party payments Notice may be provided in person, electronically, or by mail 7

8 What does the rule do? Expands the category of individuals and financial institutions that will be treated as fiduciaries under ERISA and IRC Section 4975 If you provide a recommendation to a plan sponsor, to a plan participant, to a person considering a rollover/distribution/stay in plan or an IRA, you will be a fiduciary, required to act in the best interests of the customer Includes existing plans and IRAs Generally, if you are a fiduciary under the proposal, you will need to comply with an exemption from the prohibited transaction rules under ERISA or the IRC 8

9 Fiduciary responsibility Investment advice must be without conflicts, or in accordance with a prohibited transaction exemption or DoL guidance Conflict: investment advice fiduciary or affiliate may not receive additional revenue as a result of investments for ERISA plan or IRA If conflicted, the advisor will breach its fiduciary duty to the recipient and be liable for engaging in a prohibited transaction under ERISA and/or IRC Penalties include significant excise taxes and possible plan disallowance 9

10 Fiduciary responsibility ERISA requires that a fiduciary be held to the highest standard of conduct May not engage in self dealing and must act in the sole interest of the plan, participant or beneficiary in a manner that a prudent expert would under similar circumstances This is not the Investment Adviser s Act This is not just another piece of disclosure 10

11 Exemptions Don t need an exemption: Neither you nor your affiliates have a conflict Multiple revenue streams (e.g., 12b-1s and commissions) conflict Commissions conflict If you want to advise a customer to rollover from a plan or another IRA, you will need an exemption if your fee can be attributed to that advice 11

12 Exemptions Best Interest Contract Exemption Major cornerstone of the rule Appears to be the only exemption for rollover recommendations No discretion Litigation risk; challenging disclosure regime 12

13 Best Interests Contract Exemption Allows advice to the following retirement investors: ERISA plan participants and beneficiaries in participant-directed plans (including ERISA 403(b) plans) IRA owners Plan sponsors (change from proposal) Allows conflicted compensation not ordinarily considered allowable under the prohibited transactions in ERISA/IRC Provides ability to offer packaged, transaction-based mutual fund IRAs and variable annuity products 13

14 Best Interests Contract Exemption BICE requirements: Written contract at or prior to executing the transaction Acknowledge that the financial institution is a fiduciary under ERISA, and/or the IRC Recommendation must be in the best interest of the advice recipient without consideration of financial interests of the adviser or its affiliates Compensation must be reasonable 14

15 Best Interests Contract Exemption BICE requirements: Advice provided by an employee or agent of a financial institution Comply with Impartial Conduct Standard ; disclose conflicts of interest Warrant adoption of policies and procedures designed to reduce the impact of conflicts of interest Disclose whether any proprietary products are offered or whether any revenue sharing or other fees are received from non-proprietary funds Must furnish other disclosure upon request 15

16 Best Interests Contract Exemption BICE requirements: Subject to DOL audit, class action lawsuits, and state contract law claims Contract may not contain exculpatory language and must represent that the compensation received is reasonable Can exclude punitive damages 16

17 Best Interests Contract Level Fee Exemption BICE Level Fee Exemption requirements: Applies if the only fee received by the financial institution, adviser and any affiliate in connection with advisory services is a level fee disclosed in advance to the retirement investor Level fee is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment recommended and Specifically excludes receipt by the adviser, financial institution or any affiliate of a commission or other transaction-based fee in excess of a level fee Practically excludes affiliated product company products 17

18 Best Interests Contract Level Fee Exemption Unavailable if either the adviser, the financial institution or any affiliate receive transaction-based compensation (e.g., commissions, 12b-1 fees or revenue sharing) in connection with the advisory services Level fee fiduciaries are not required to enter into a written contract, but must provide a written acknowledgment of fiduciary status, adhere to the impartial conduct standards, and document the specific reasons why a level fee arrangement was considered to be in the retirement investor s best interest Additional requirements for rollover recommendations under Level Fee 18

19 Grandfathering BICE includes a grandfather provision for accounts in existence on the Applicability Date Can provide advice after that date on investments that were acquired for a retirement account before that date Investment recommendations made after the Applicability Date must meet the prudence component of the Best Interest Standard including the without regard to proviso 19

20 Grandfathering Does not cover advice on new investments for, or additional investments in, a grandfathered account after the Applicability Date Except in the case of systematic investment programs and exchanges among funds or variable annuity options pursuant to an exchange privilege or rebalancing program, but only if the program was set up before the Applicability Date Other conditions apply, including that the compensation paid to the adviser, financial institution and their affiliates or related entities after the Applicability Date not be in excess of reasonable compensation 20

21 Potential industry impacts (my odds) Litigation against DoL will not succeed (60/40) Customer litigation will increase and be more costly (90/10) Industry consolidation continues (80/20) Move toward advisory (95/5) Lower account minimums across products and platforms (100) Advisory fees will remain stable or slightly rise (75/25) Front-end commissions will drop across products (85/15) Non-affiliated insurance producers will find a home (95/5) Fewer dollars will roll out of plans (95/5) Fewer annuity replacements in qualified accounts (95/5) Fewer alts (non-traded REITS/BDCs) in qualified accounts (60/40) 21

22 Voya s commitment to you Proactive since DOL released proposal a year ago Committed to supporting our customers and partners and helping them evolve in a changing environment Agility, experience in adapting to complex regulations Expertise, scale, ability to innovate 22

23 Voya resources Voya final rule letter: Voya Investment Management key takeaways: Coming soon! Advisor Q&A Client Q&A 23