Do You Qualify for the DOL’s Best Interest Contract Exemption (BICE)?

Along with the development of the Department of Labor’s fiduciary rule and its myriad of compliance nuances also comes a new type of prohibited transaction exemption (PTE).  Created to enable a level of continued flexibility within its parameters, the new exemption is especially attractive for advisors whose financial practices include the following:

• Variable compensation like commissions or incentives
• Transactions that provide commission trails
• Product recommendations carrying 12b-1 fees
• Direct participation program (DPP) product sales with revenue sharing compensation

Why? Because in a post-DOL rule environment, brokers and advisors who make these types of recommendations may need to reshape or, at the very least, adjust their business model. This new class of PTE may provide relief amidst newly imposed stringency.

Acting in accordance with these PTE rules, firms and individual advisors can continue to engage in what are considered conflicted compensation transactions so long as they, among other things, commit to putting their clients’ best interest first, document it, and disclose any conflicts that may prevent them from doing so.

Called the “Best Interest Contract Exemption,” or BICE for short, this PTE requires that fiduciary advisors and financial institutions meet several specific terms before providing retirement advice that results in “conflicted compensation.”

How and When Can Advisors Use the BICE?

The new fiduciary rule causes previously acceptable or “suitable” recommendations and transactions to fall under the prohibited transactions umbrella, requiring financial advisors still wishing to make these types of recommendations to leverage the BICE:

1. Recommending a 401(k) rollover into an IRA that would allow advisors to be compensated on assets not previously under their management
2. Advising a client to switch from a non-fee based account to a fee-based account for which the advisor gets to earn new, recurring fee revenue that was not previously earned
3. Recommending to shift from a low-cost 401(k) or IRA account to a new IRA account with higher costs

To qualify for the BIC exemption, there must be a contract between the investor and advisor, as well as one between the investor and the financial institution (if one is involved). Depending on whether the advisor is independent or works at a firm, there are slightly different requirements to fulfill.

BICE Qualification Requirements for Individual Advisors

Financial advisors and RIAs who still seek to run their practice according to a business model subject to "prohibited transactions" guidelines,  such as the above scenarios, will need to sign a “Best Interest Contract” agreement with the client. The contract requires advisors to:

• Explicitly acknowledge their fiduciary status as it relates to retirement and investment advice
• Adhere to The Impartial Conduct Standards, meaning that the advice they give is in the investor’s best interest, that they will charge no more than “reasonable compensation,” and make no misleading statements about conflicts of interest, compensation and investment transactions

After the contract has been signed and as long as the advisor adheres to the fiduciary standards, they will be afforded the protection and flexibility the BICE offers.  

Qualification Requirements for Financial Institutions That Oversee Advisor-Client Relationships

Financial institutions overseeing client-advisor relationships will need to take a few more steps than individual advisors to gain the PTE protections of the BICE. In addition to the two requirements above, financial institutions must also:

• Implement processes and strict guidelines that proactively and prudently focus on avoiding actions impartial in nature
• Refrain from giving or using incentives, like bonuses or special awards, for advisors to act contrary to the client’s best interest
• Have a web page that fairly and completely discloses fees, compensation arrangements, and any Material Conflicts of Interest
• Disclose what measures will be used to prevent violations of the Impartial Conduct Standards, as well as name an individual responsible for addressing any issues and monitoring the process

Knowing when the BICE requirements apply is just as important as knowing what the requirements are. According to the new rule, an advisor’s fiduciary obligation only applies in the case of advice about retirement accounts. Advice for taxable accounts, like individual bank or brokerage accounts, are not subject to the new fiduciary rule.

Do Level-Fee Fiduciaries Need a Best Interest Contract?

In the case of level-fee practices, the full blown BICE is not required. The DOL rule has made an alternative provision for level-fee fiduciaries and firms to qualify for PTE protections under the BICE without being required to submit a full best interest contract. To qualify as a “Level Fee Fiduciary” (LFF), advisors must simply charge one level fee that's disclosed to clients before services are rendered.

The DOL recommends calculating these fees as a (level) percentage of the client’s assets under management (AUM), or as a set fee that does not vary at all with the recommended investment.

One note about the LFF exemption: an advisor does not have to already be a Registered Investment Adviser (RIA). They can be a broker receiving a level fee for a fee-based wrap account or 12b-1 fees. However, they cannot receive any commission or compensation in addition to the level fee. If a broker were to assess 12b-1 fees as well as their level fee, they would be disqualified from LFF eligibility.

Remember, the deadline for compliance with the DOL’s new rule is April 10, 2017. Understanding the full implications and opportunities of the BICE by this date is important to adequately navigate the new regulatory changes. One way to ensure that you remain in control of your success is by studying for an advanced designation like the Retirement Income Certified Professional® (RICP®) from The American College of Financial Services. This designation program will teach you how to deliver retirement income advice and counsel within the parameters of the new DOL rule’s fiduciary standards.

If you’re interested in becoming a retirement income expert, including learning how to comply with DOL standards, requirements and more, check out "5 Things You Didn't Know About the Conflict of Interest Rule But Should."