Understand Benefits of the BICE vs. BICE Lite

With finalization of the U.S. Department of Labor’s new fiduciary rule quickly approaching, there are four critical letters all advisors should know: B-I-C-E. Short for "Best Interest Contract Exemption," BICE is a special type of prohibited transaction exemption (PTE) that allows financial advisors to receive variable forms of compensation without assessing penalties, as long as financial advisors and institutions follow specific requirements. What some individuals still may not realize however is that there are two versions of the BICE, each with unique use cases, limitations and potential benefits. Thorough compliance with the DOL rule includes understanding and mastery of how, when and why to use each version.

Generally speaking, the BICE Lite exposes advisors and their firms to less risk than the full BICE because they are not contractually bound to a fiduciary standard. Some financial institutions are exercising caution when considering the BICE because it requires a signed contract that, if breached, opens the institution up to a class action lawsuit. Before using either exemption, financial advisors need to know what’s involved in qualifying for each and which option is most applicable for their needs.

The BICE is Nice For A Broad Range of Compensation Agreements

Inflexible in nature, the BICE Lite does not allow for any third party compensation like 12b-1 fees, monetary compensation for seminars, or revenue sharing. An important factor to keep in mind is that an expanded fiduciary responsibility under the DOL’s new rule is not determined by title, but by the person giving retirement advice. This means that retirement advisors are not the only ones subject to  fiduciary responsibility. Anyone who gives retirement advice must meet the new fiduciary standard.

While using the full BICE provides non-level fee advisors more compensation flexibility, these options carry with them additional requirements. One of the most notable differences between the BICE and the BICE Lite is that the full BICE requires a contract between the advisor or financial institution and an investor. This contract acknowledges fiduciary status and ensures all advice given is in the investor's best interest.

Another aspect of the BICE is that there are more disclosures required by the financial institution or advisor. Required disclosures to qualify for the BICE include:

• The Best Interest Contract acknowledging fiduciary status, signed by the client and advisor
• Website disclosures that indicate the process for quarterly reviews
• Disclosures that identify third-party or proprietary recommendations if applicable
• Disclosures pertaining to point-of-sale transactions 
• A breakdown of the compensation pricing structure

Built into the contractual components are safeguards requiring financial institutions to put policies and procedures into place guaranteeing advisor compliance with impartial-conduct standards. The Best Interest Contract also requires institutions no longer administer or rely on sales quotas or offer incentives that could lead to questionably motivated recommendations.

One of the BICE’s most welcomed benefits is that it can be applied to a wide assortment of IRA and non-ERISA-related compensation agreements. But aside from the compliance costs, operational changes and disclosure requirements, some would argue that the main drawbacks of using the BICE is that it can leave institutions vulnerable to class action lawsuits in the event the Best Interest Contract is breached.

The BICE Lite: Strictly for Level-Fee Fiduciaries

While the full BICE may seem intimidating with extensive disclosure requirements and paperwork, it’s actually more flexible to use than the lighter version. The BICE Lite is a particular type of exemption for level-fee fiduciaries only, and one of its biggest benefits is not requiring a lengthy Best Interest Contract between the investor and advisor or institution.

For advisors and institutions to qualify as level-fee fiduciaries under the BICE Lite the following requirements must be met:

• A simple written statement of fiduciary status from the advisor or institution
• Compliance with the standards of impartial conduct — this includes receiving
  “reasonable compensation,” and not making misleading statements to investors about recommendations
• A level-fee for the advisor, supervising firm, and any affiliates — third-party payments (like fees for educational seminars, 12b-1 fees, revenue-sharing payments, etc.) are not allowed and will disqualify advisors and institutions from an exemption under the BICE Lite

Despite level-fee fiduciaries and their firms not having to enter and sign a contract to qualify for the BICE Lite, they will still need to establish the prudence of their advice and recommendations as they relate to the best interest standard originally set forth in the Investment Advisers Act of 1940. Proper documentation of why a recommendation is in a client’s best interest as well as documentation of alternative recommendations may require advisors to conduct more thorough information gathering and analysis of all the relevant factors related to an investor. Important note: financial services professionals who already operate under a fiduciary standard may not need additional documentation to qualify for the BICE Lite.

Both versions of the DOL rule’s exemption have limitations and benefits, and choosing the right one greatly or wholly depends on the advisor’s or institution’s business model. Advisors who offer investment advice or manage retirement assets and income for their clients need to have a comprehensive understanding of all their clients’ needs and they need to know both forms of the BICE, inside and out.

The DOL’s fiduciary rule will be finalized April 2017. Are you ready? In “5 Things You Didn’t Know About the DOL Conflict of Interest Rule But Should”, Dr. Craig W. Lemoine, CFP® provides expert insights to help financial services professional better prepare for a post DOL environment.