The Department of Labor’s Fiduciary Rule, Part 3: Implications for Wholesalers

Contributed by Meghan Warren, special contributor

The Department of Labor’s (DOL) new fiduciary standard, as of last Friday, is officially in effect. We’ve already covered it in prior blog posts (Part 1 here; Part 2 here) the broad contours of the rule, as well as the ways it’s poised to impact the industry. But wholesalers are in a unique position to be affected by the rule—what are their responsibilities when working with advisors and their clients? Will they need to transition their compensation model to include more fee-based arrangements?

At IMCA’s Annual Conference Experience last month, Marcia Wagner, J.D., offered her insights into how the rule will affect wholesalers specifically. The challenge ultimately lies in distinguishing where conflicts of interest might arise, and identifying when the wholesaler’s interactions with advisors’ clients—for example, during an educational seminar—cross from general information into advice. This is where the Best Interest Contract Exemption (BICE) comes into play for the wholesaler segment; under the new rule, the DOL requires an exemption for brokers and insurance agents, including advisors to RIAs.

Here are the key points wholesalers need to know about how to stay compliant with the new rule, given their unique position vis-à-vis their customers:

  • Under the BICE, variable compensation (e.g., commissions) is allowed for non-discretionary advice, as the ultimate decision-making authority remains with the client. However, discretionary advice remains subject to the fiduciary standard.
  • The BICE varies based on the type of plan wholesalers are advising. Non-ERISA plans and IRAs require a “full-blown” version of the BICE, which have more stringent terms—such as a fiduciary standard of care, disclosures of compensation and conflicts, providing specific compensation figures upon request, policies for mitigating conflicts, and arbitration requirements—and require a written contract to this effect. ERISA plans, however, are subject only to a “disclosure” form of the BICE. The requirements are the same, but no written contract is required; just a written statement of fiduciary status and general disclosures on compensation and conflicts.
  • Differential compensation paid must be based on neutral factors. In other words, higher compensation is permitted based on the time or expertise required to sell a specific investment category, but payouts cannot vary for similar investments within the same category.
  • Compensation is subject to a reasonability standard, and must align with market conditions. Wholesalers should review their compensation structures every few years. This also means wholesalers need to keep a close eye on the incentives they offer their representatives to ensure they don’t become “too valuable” in the eyes of regulators.
  • Rollovers may be a particularly tricky area, as cross-selling in this area is common and can create potential conflicts of interest. In addition, advisors’ fees on rollover assets may be higher than fees on plan assets. Under the DOL rule, any rollover advice would be subject to the fiduciary standard, unless wholesalers obtain the appropriate BICE.

There is quite a bit of complexity wholesalers must navigate to ensure compliance with the new rule. The best way to manage this? Education, education, education. Wholesalers can benefit from pursuing a professional designation like the CIMA—it helps them understand and adhere to the same ethical standards their customers do, facilitating strong outcomes for the end investor.

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