By now you have probably heard that a new Department of Labor (DOL) law went into effect that requires financial advisors to be fiduciaries when advising you what to do with your retirement accounts. This is a standard of care that requires them to put their client’s best interest ahead of their own. Believe it or not, most financial advisors have not been doing this. Many financial advisors accept commissions or other production-based incentives when they sell you products offered by their firm and use this to dictate the investment vehicle they help you select. Before this law took effect, these commission-based or fee-based advisors would recommend products that were “suitable” for you, but not necessarily “best” for you. By contrast, a NAPFA Registered Investment advisor who is “fee-only” like GW Financial, Inc. acts as a fiduciary to their clients in all matters since they don’t accept commissions.
Commissions are a lucrative business for fee-based financial advisors, so as you can imagine, there have been many staff meetings at these firms to circumvent the fiduciary requirement. The solution they came up with is called BICE, which stands for Best Interest Contract Exemption, which they lobbied the DOL to approve.
Basically, that same advisor who sold you financial products in the past, but never claimed to be a fiduciary, must now promise to act as a fiduciary when giving advice on your retirement accounts (including annuities). He is still receiving the same commissions from the products he recommends, but by signing BICE he now promises to:
Acknowledge fiduciary status with respect to investment advice to the Retirement Investor
Adhere to “Impartial Conduct Standards” which requires the fiduciary advisor to:
Give advice that is in the Retirement Investor’s Best Interest;
Charge no more than “reasonable compensation”; and
Make no misleading statements about investment transactions, compensation, and conflicts of interest
Implement policies and procedures reasonably and prudently designed to prevent violations of the Impartial Conduct Standards
DOL rule states that “Prudent advice is advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution, or their Affiliates, Related Entities, or other parties.”
From a practical standpoint, what does this mean to you as the client? If you and your advisor sign BICE, your commission-based advisor will continue to do exactly what he has always done, and sell you products that earn him commissions. The difference now is that you have more legal recourse to recover damages if you later feel that those products were not prudent for your circumstances, or that the advisor put his/her interests ahead of your own.
The safest way to avoid any potential conflicts of interest is to get your investment advice from a “fee-only” advisor who does not accept commissions, and whose only incentive is to provide you with the best advice.