Generally, fiduciary advisors cannot recommend an investment that could affect their compensation. The regulators believe compensation, like commissions, and 12b-1 fees paid by mutual funds can inappropriately affect the advisor’s judgment in making recommendations. (See the Best Interest Contract (BIC) exemption discussion below.)

With the final fiduciary rule, the DOL prohibits firms from using quotas, bonuses, or contests to compensate advisors. Acceptable pay models include:

• Flat fees
• Compensation based on a percentage of assets

The DOL rule does include a pathway for advisors to continue receiving commission, through the Best Interest Contract (BIC) exemption.  

The final fiduciary rule includes a BIC exemption that allows advisors to continue to be paid on commission. To qualify for the exemption, the advisor’s firm will have to:

• Acknowledge that they and the advisor are fiduciaries and that they are working in their clients’ best interests.
  
• Adopt policies to ensure that all advice meets impartial conduct standards, including ensuring that advisor compensation practices do not encourage inappropriate recommendations.
  
• Disclose important information about the advisor’s services, fees and compensation.
  
• Agree, in the case of IRAs, that the firm and their advisors will adhere to these requirements in a written contract that is enforceable by investors.

Advisors who are considered fiduciaries under the new DOL rule can generally receive a commission or a 12b-1 fee from an IRA or other retirement plan only if they comply with the terms of a prohibited transaction exemption, like the new BIC exemption.

The new rule includes a grandfather provision for preexisting assets, which is effective through April 10, 2017. Current and/or new IRA clients who are invested in A and C shares will be able to continue receiving advice after the effective date without having to comply with the new BIC exemption, provided that the advice falls within the grandfather exception.

The grandfather exception potentially applies to:

• Hold recommendations on A and C shares made after April 10, 2017.
• Exchanges after April 10, 2017.
• New purchases that relate to systematic contribution programs established before April 10, 2017.

The grandfather exception does not require use of a contract or require new disclosures. It is, however, available only if a hold or exchange recommendation is in the best interest of the investor, the investor pays no more than reasonable compensation and the advisor communicates honestly with the investor.

We believe that the vast majority of investment professionals already act in the best interests of their clients.

This final DOL fiduciary rule imposes new compliance requirements, including a BIC, for certain commissionable transactions. The rule exposes advisors to legal liability should they violate the fiduciary standard.