Why Should You Care About BICE vs. BICE Lite?

 Merrill Lynch recently announced that they would no longer offer commission-based products in Individual Retirement Accounts (IRAs). Why would Merrill make such a decision? They most likely decided that operating under the Best Interest Contract Exemption (BICE) carried more litigation and compliance risk than they were willing to bear.

Instead, investors can pursue providing investment advice for IRAs under what has come to be known as the BICE Lite. To understand the BICE Lite, it’s helpful to realize that the heart of the DOL fiduciary rule is concern about conflicts of interest —when advisors may be incentivized to make recommendations that are not in the best interest of their clients — largely due to compensation arrangements. By taking a closer look at these incentives, we can start to see why the requirements are more stringent when there is greater cause for concern about the incentives of the advisor. Advisors operating as level-fee fiduciaries have fewer requirements because they arguably have fewer conflicts of interest within their compensation.

For example, if an investor meets with an advisor who receives variable compensation, they may be incentivized to provide a financial recommendation that will provide the advisor with the largest compensation. If, however, the advisor operates under a level-fee compensation model, meaning that compensation doesn’t change regardless of the recommendations, then the advisor is more likely to provide advice that is in the best interest of the client since the advisor and the client have incentives that are more closely aligned. Additionally, advisors who operate under BICE Lite are not allowed to receive compensation from third parties, which further aligns the incentives of the advisor and the client.

However, things get a little stickier when dealing with a rollover from a qualified retirement plan into an IRA. Often, advisors do not receive compensation until the assets are under their management, which means that they are going from no compensation to receiving some compensation. In other words, advisors are incentivized to encourage rollovers because they can be compensated only if the assets are brought under their management. In this case, advisors need to document that the rollover is in the best interest of the client, which will probably involve collecting considerably more information than has typically been the case for rollovers before the DOL rule.

To document that the rollover is in the best interest of the client, advisors also need to consider other alternatives, including potentially leaving the assets in the plan. This analysis should include consideration of the fees and services available to the client if the assets are left in the plan, and how the fees and services are more favorable if the assets are transferred to an IRA.

This analysis and documentation may seem daunting, but at least some firms believe that these requirements to be less onerous than those under the full BICE.

Are you interested in learning more about complex issues related to the DOL fiduciary rule? Become a trusted retirement income expert to your clients and read 5 Things You Didn’t Know About the DOL Conflict of Interest Rule But Should.