DOL FIDUCIARY STANDARD:

Transcription

1 DOL FIDUCIARY STANDARD: C OUNTDOWN TO THE I MPLEMENTATION OF THE F INAL R ULE Presented By: Lawrence T. Divers CRSP, CISP, CRC, AIFA, CWS, AFIM

2 THE FIDUCIARY STANDARD OF CARE Overview of the DOL Fiduciary Rule Within the new DOL Fiduciary Rule are several components impacting the way advisors are identified, as well has how they conduct their business. The new DOL Fiduciary Rule: Redefines the Fiduciary Standard for IRAs and QRPs On April 6, 2016, the US Department of Labor issued its final version of a set of investment advice regulations & accompanying prohibited transactions exemptions. This was the culmination of a process by the DOL to comprehensively define fiduciary and apply rules to its use. Adjusts situations in which advisors are seen as fiduciaries and work in the Best Interest of their clients Differentiates between Qualified Retirement Plans and IRAs in regards to fiduciary activities Changes liability scenarios resulting from breach of contract for certain groups Introduces two new PTEs (Best Interest Contract & Principal Transaction Exemptions) and amended six existing PTEs 7

3 THE FIDUCIARY STANDARD OF CARE Key Dates of the Final Rule Transition Period - BICE, Principal Transactions Exemption relief fully available subject to limited conditions Final rule: published in the Federal Register. JUNE 7, 2016 February 02, 2017, White House issues memorandum ordering a review of implementation for 180 days. Then on March 10, 2017, the DOL subsequently issued it s own 60-day delay which temporarily delayed the implementation of the Fiduciary Rule from April 10, 2017 to June 9, JUNE 9, 2017 Final Rule and complex of exemptions fully applicable, all policies, procedures, and compensation plans finalized, PTE relief subject to all conditions including APRIL 8, 2016 Effective Date Final Rule officially becomes law; no longer subject to amendment. FEBRUARY & MARCH 2017 Applicability Date Final Rule partially applicable. JANUARY 1,

4 THE FIDUCIARY STANDARD OF CARE Retirement Assets and Plans $25.3T Total US Retirement Assets $4.8T Total US 401K Assets $7.8T Total US IRA Assets 1 IRAs include traditional IRAs, Roth IRAs, and employer sponsored IRAs (SEP IRAs, SAR SEP IRAs, and SIMPLE IRAs). 2 Employer sponsored retirement plans include DC and DB retirement plans. Sources: Investment Company Institute and U.S. Census Bureau. See ICI Research Perspective, The Role of IRAs in U.S. Households Saving for Retirement,

5 THE FIDUCIARY STANDARD OF CARE Determining Fiduciary Status Under the Final Rule, a person is considered a fiduciary if they provide any of the following, for a fee, to a plan, plan fiduciary, plan participant, plan beneficiary, IRA, or IRA owner: Services A recommendation as to the advisability of acquiring, holding, disposing of, exchanging securities, or other investment property recommendations regarding rollovers, transfers, or distributions from a plan or IRA or A recommendation as to how securities or other investment property should be invested or A recommendation as to the management of securities or other investment property, including: recommendations on selecting other people to give investment advice or investment management services recommendations on selecting investment account arrangements If they do any of the above, directly or indirectly, with an affiliate, then: Actions Represent or acknowledge they are acting as a fiduciary + Render the advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular needs of the advice recipient 6 Recommendation = Any communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from a particular course of action

6 THE FIDUCIARY STANDARD OF CARE FAQ #1 Impartial Conduct Standards There are three components to the Impartial Conduct Standards Give advice that is in the BEST INTEREST of the Investment Advice Recipients Charge no more than REASONABLE COMPENSATION Make NO MISLEADING STATEMENTS about investment transactions, compensation, & conflict of interest 7

7 DETAILS OF THE DEPARTMENT OF LABOR S NEW FIDUCIARY DISCLOSURES Defining Best Interest Investment advice is in the Best Interest of the Retirement Investor when the advisor and financial institution providing the advice act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances and 8 needs of the Retirement Investor, without regard to the financial or other interests of the advisor, financial institution or any affiliate, related entity or other party. How Does One Actually Determine Best Interest? Discover Needs & Aspirations Analyze Current Plans, Fees, and Costs Assess Compensation of Solutions Deliver Recommendation Document Everything

8 NEW DEFINITIONS OF INVESTMENT ADVICE Affected Assets vs. Non affected Assets Affected Plans IRC 4975 Tax-qualified arrangements Sole proprietor plans Section 401(k) plans IRAs Archer Medical Savings Accounts HSAs Coverdell Education Savings Accounts ERISA-covered section 403(b) plans maintained by private employers Non affected Plans Section 529 plans Non-ERISA section 403(b) plans maintained by individuals or government entities Funded section 457 (typically government) plans Nongovernmental section 457 plans Non-qualified, non-erisa plans Health insurance policies, disability insurance policies, term life insurance policies and other property to the extent the policies or property do not contain an investment component 9

9 EXCLUSIONS FROM INVESTMENT ADVICE Investment Education Is Not Investment Advice General Investment Information The DOL Fiduciary Rule extended Interpretive Rule 96-1 with minor modifications to all Qualified Retirement Plans and IRAs. An investment advisor may discuss: General retirement investment information i.e., risks, returns, tax deferred investment, etc. Historic rate of return differences between market classes, based on a standard market index Fees, expenses, and their impact on rates of return Inflation Future retirement income needs Risk tolerance Time horizons Retirement related risks General asset management strategies An investment advisor will be deemed a fiduciary if the following information in included regarding: Specific investment products Plan alternatives Distribution options Specific alternatives or services outside the plan 10

10 NEW DEFINITIONS OF INVESTMENT ADVICE Transition Rules for Existing Accounts Existing accounts may be grandfathered after the applicability date of 6/09/17 to 1/01/18. Policies, procedures, revised compensation plans, and new discloses (e.g. BIC) all moved to January 1, Focus is to pursue implementation of policies and procedures to reduce risk of a private litigant. Advisors must: Work in the Best Interest of their client Receive reasonable compensation Not make misleading statements and disclose conflicts of interest 11 Delayed until January 1, 2018: PTE Full policies, procedures Revised compensation plans to remove conflicts of interest

11 NEW PROHIBITED TRANSACTION EXEMPTIONS & MODIFICATIONS TO CURRENT PROHIBITED TRANSACTION EXEMPTIONS FAQ #2 PTE Fixed Rate Annuities and Mutual Fund Shares Provides relief to insurance agents, brokers, and insurance companies receiving commissions when plans or IRAs purchase fixed rate annuities and mutual funds (plans only). Exemption only applies to fixed rate annuities. Variable/indexed annuities and securities exemption revoked Must rely on BICE Revoked exemption for IRA purchases of Mutual Funds Exemption applies to rollovers and distributions Allows employee benefits, including third party payments, as permissible compensation New BICE like Requirements Impartial Conduct Standards without warranty 2. Does not receive more than reasonable compensation 3. Does not make any materially misleading statements

12 DETAILS OF THE DEPARTMENT OF LABOR S NEW FIDUCIARY DISCLOSURES New Prohibited Transaction Exemptions The DOL Fiduciary Rule includes two new Prohibited Transaction Exemptions: 1 2 Best Interest Contract Exemption Principal Transaction Exemption 13

13 DETAILS OF THE DEPARTMENT OF LABOR S NEW FIDUCIARY DISCLOSURES Best Interest Contract Exemption Overview The Best Interest Contract Exemption allows advisors to continue receiving compensation which would normally be prohibited when providing investment advice to retirement clients There are four three levels to the Best Interest Contract: Industry Connection Full BICE Level Fee BICE Small Plan BICE Transitional BICE This exemption is helpful for firms who wish to keep their current compensation structures, including: Level fees 12b 1 fees Brokerage commissions Sales loads Revenue sharing payments Third party payments 14

14 NEW PROHIBITED TRANSACTION EXEMPTIONS & MODIFICATIONS TO CURRENT PROHIBITED TRANSACTION EXEMPTIONS Principal Transaction Exemption Principal Transaction Exemption allows the purchaser or seller to receive mark ups, mark downs, or other similar payments for themselves applicable to the transaction. It is available to Financial Institutions and allows fiduciaries to purchase and sell assets for a plan or IRA through principal transactions or riskless principal transactions as a result of an advisor s or financial institution s advice. Principal Transactions apply to the cash purchases and sales of securities from the Financial Institution s own account, where the advisor is affiliated with a financial institution. Buy/Sell Debt Securities Interest in Unit Investment Trusts CDs US corporate bonds (registered) Treasuries Agency Debt Securities Agency Guaranteed Asset Backed Securities 15

15 WHAT S NEXT? Unanswered Questions: The Future Is Unclear To Rollover/Transfer or NOT TO Rollover /Transfer? That is the question Proving Best Interest Clarity on Reasonable Compensation Fiduciary vs. Suitability: How to Document Will the Requirements be Expanded or Contracted? Future focus: Clean Shares T Shares Limiting Product Shelf 16

16 THE FIDUCIARY STANDARD OF CARE Summary Key Takeaways: June 9, 2017 Professionals working with IRAs and QRPs must follow the Fiduciary Standard DOL advocates compliance over enforcement Must follow the three Impartial Conduct Standards January 1, 2018 Full compliance including all policies and procedures Best Interest Contract Exemption begins & applies to non-level fee products PTE for annuities will change Proprietary products are allowed Principles-based not Rules-based (DAAADD) 17 Investment advice is narrowly defined Expect change to the Final Rule by January 2018

17 Great Change Always Creates Great Opportunities Whether your landscape shifts significantly or not, you and your firm must be knowledgeable about the changes and be prepared to provide clarity to your clients. We have multiple ways for you to continue the journey toward Implementing the DOL Fiduciary Rule: Cannon on Twitter Cannon on LinkedIn Larry Divers on LinkedIn Ask Questions & Make Comments Take a Course Schedule an Appointment for Team Options Send me More Information About Future Learning Opportunities For more information, visit us online at or call