Understanding the DOL Rule: BICE

The U.S. Department of Labor’s new fiduciary rule is poised to change the financial services landscape dramatically, however the rule does not draw bright lines of acceptable and unacceptable practices. The financial services profession may be unclear on the details and permissions that exist regarding variable commissions on products within retirement accounts — and whether or not advisors are still allowed to use such products.

A pressing issue in the profession remains the use of deferred annuity products. Will these be allowed in IRA accounts? What about retirement plans? Will annuity products continue to pay commissions or will fee oriented products hold court? A portion of the answer lies on product manufacturers, but agents and advisors can look to the new conflict of interest rule for clarification.

The Best Interest Contract Exemption, or BICE, provides a path of deferred annuity product use. BICE itself is a prohibited transaction exemption (PTE) that allows insurance companies and brokerage firms to enter into contracts with consumers pledging a fiduciary standard of care and elements of agent governance. By entering and abiding by BICE, company representatives and agents can earn commissions on products and potentially offer proprietary products. BICE allows agents a measure of flexibility in offering products while protecting and extending a fiduciary duty to their clients.

BICE vs. BICE Lite: An Overview

To understand BICE, an advisor must first understand the concept of conflicted compensation. The Department of Labor prohibits fiduciaries giving advice that is considered conflicted, or in other words, advice that would provide a financial services professional with a larger fee or commission. Rarely is a compensation model truly free of any conflicts, so the DOL has implemented exemptions that allow some types of conflicted advice. Such exemptions are referred to as prohibited transaction exemptions (PTEs).  PTEs include specific consumer protections and mandate a fiduciary duty of care to a client. Without PTEs, financial services professionals operating under traditional compensation models would often be subject to severe penalties and litigation.  BICE is an example of a PTE.

BICE requires an insurer, broker or RIA to enter into a contract with clients. The written contract must state that a consumer will be treated with a fiduciary standard, it must contain disclosure requirements like point-of-sale transaction disclosures, contract disclosures and website disclosures.

BICE Lite

BICE Lite (as it has become known), refers to a PTE that applies to level-fee fiduciaries, specifically advisors who receive only fees from advisory services and are not compensated in any other capacity based on types of products sold. This level-fee PTE is somewhat less robust than regular BICE; there is less paperwork, as it assumes the interests of investors and advisors are aligned in a level-fee arrangement.

BICE and BICE Lite both require a fiduciary standard of care. BICE allows commission compensation, where acting as a level-fee advisor restricts third party payments. Generally, uncertainty exists today about product shift and evolution to comply with BICE. Some of today’s products are suitable for consumers, but they may have a harder time meeting standards set by BICE agreements. This uncertainty may continue to push professionals and companies into more predictable fee-based models.

Sugar and Spice and Everything BICE: What Do Advisors Really Think?

For an advisor, a challenging element of meeting BICE requirements will be documenting recommendations and advice. Professionals will need to consistently and reliably document why actions are in the best interest of a client, and may wear a larger target when markets turn sour. Professionals will need to document processes, moving the focus from products, to comply with the new rule. The DOL requires that advisors operating under BICE agreements earn reasonable compensation on their advice. The DOL does not provide clear guidance on “reasonable,” but many advisors equate reasonable with consumer product cost. While product cost is an element of meeting a fiduciary duty, it is not all-encompassing. Focus on fiduciary standards of care, doing what is right, documenting strategies, and aligning interests.

Fee-only financial planners will also see business model changes under the new DOL rule. Any compensation model where an advisor earns more from a rollover, or charges an asset management fee on qualified assets, will need to comply with appropriate PTEs.

BICE Fact Sheet

Below are answers to some of the most common questions regarding BICE, according to the United States Department of Labor website:

• BICE applies to IRAs, qualified dollars, and non-ERISA retirement plans
  Starting April 20, 2017 (one year after the industry’s definition of fiduciary has broadened), partial BICE compliance will be required. Full BICE compliance is required by Jan. 1, 2018.
  
  
• BICE contract requirements
  Commit the firm and advisor to providing advice that is in the client’s best interest
  Confirm that the firm has adopted policies and procedures designed to mitigate conflicts of interest
  Clearly and prominently disclose any existing conflicts of interest like backdoor payments and hidden fees
  BICE contracts must direct customers to a webpage that clearly outlines and discloses compensation agreements

• The DOL is working on a separate rule to exempt states that support state-sponsored retirement accounts for small businesses

• BICE also applies to robo-advisors, which must use the PPA safe harbor to comply
  
  
• Level-fee robo advisors may be able to use the level-fee exemption (BICE Lite)

This short list of BICE facts provides just a glimpse into what advisors need to know. Independent agents, brokers, or non-fee based advisors, should not wait to start complying with the new fiduciary rule’s mandated requirements.

Learn more about the new DOL rule and become your clients' trusted retirement expert, check out "5 Things You Didn't Know About the DOL Conflict of Interest Rule But Should."