Bottom line: A best interest contract exemption allows financial advisors that still make their money by selling products for commissions to be compliant with the new DOL fiduciary rule when working with your retirement accounts. These retirement accounts were expanded to include individual retirement accounts (IRAs) but do not apply to other accounts like your brokerage account or college saving 529 accounts. Many of the fiduciary requirements are still in place even if you sign the BIC, but you have to ask yourself if exempting your best interest is really what's best for you.
In the past couple of days, you may have received an unexpected call from your financial advisor. The conversation went pretty well, as usual. He is always so nice and probably asked how your summer was going, or how that promotion at work was shaping up. At some point, he undoubtedly worked in a comment on the Department of Labor’s (“DOL”) Fiduciary Rule, how D.C. is just adding more requirements for us all. Unfortunately, that means you need to sign yet another form for the lawyers that he called the BIC. Sounds harmless enough, but hopefully when you see that document come through your inbox, you get a little curious.
Sure it looks nice, but it’s still lipstick on a pig. This time it’s your piggy-bank they are trying to cover up!
SOME RULES ARE WORTH HAVING (FOR YOU, NOT THEM)
Welcome to the third installment in our series on how the recent Department of Labor's “Fiduciary Rule” may be impacting our financial system and you the investor. As a Registered Investment Advisor (RIA), we at Action Point Financial always have been and always will be fiduciaries, but this new rule is causing some substantial changes for broker-dealer firms.
To quickly recap our previous discussions on the "fiduciary rule," we first talked about what a fiduciary investment advisor is and how to know if you’ve got one (spoiler: you probably don’t) The Day Has Finally Arrived! Fiduciary Rule is Here: An Open Letter to Consumers. Later we discussed how costly (and how transparent) these advisory services should be (Arbiter of Reasonableness: What is Reasonable & Who Gets to Decide?. If you haven’t read those, they’re both quick reads and worth your time to understand the rest of this article. Go ahead and read them, now’s a good time.
If you are still working with a financial advisor at a broker-dealer firm, a word of caution to you, especially if they approach you with that little form called a BIC or Best Interest Contract Exemption (BICE). While these individuals may call themselves "financial advisors" they are probably better represented by their former title, stock broker, meaning they earn money by selling you products that pay them with commissions, 12b-1 fees, fund loads, or profit sharing with proprietary products.
A fiduciary financial advisor has the legal obligation of putting their clients’ needs first and taking the highest level of care when choosing investments. This has not been the case with financial advisors working at broker-dealers. For them to sell a product to you, they previously only needed to meet "suitability" standards based on age and financial situation, with no regard to fees or diversification. Additionally, they are only able to provide general financial education to those seeking their services and not permitted to provide detailed advice to their clients, even though they call themselves financial advisors.
WHAT IS THE BIC
Enter the Best Interest Contract Exemption (BICE) or even BIC for those trying to hide that signing it actually waives your rights. The majority of Financial Advisors are still brokers or may be dually registered, but the new DOL "fiduciary rule" requires anyone working with a retirement account to be a fiduciary. These accounts include your 401k or 403b, any of your IRAs, or other ERISA accounts that you might have.
Getting paid a commission does not fit well in the fiduciary world since it always adds another conflict of interest for the advisor. Once signed, the BICE allows the advisor to be able to continue to earn that nice commission when selling you funds for your retirement accounts. In whose best interest is that?
WHAT IS NOT COVERED
The BICE still requires those advisors that charge commissions to maintain many of the fiduciary standards such as acting in the client’s best interest by being prudent and loyal while properly disclosing the fees they charge in a transparent manner. However, these requirements only apply to your retirement accounts, and only when you have given them the ability to act with discretion. This means if you call your broker asking for a specific product, they can sell you it, even if it should not be in your portfolio. If you were to call your advisor requesting a particular product, or if this was for your brokerage (non-tax deferred accounts) they do not need to follow these rules.
WHY WOULD YOU SIGN IT?
The BIC drastically increases the liability for many broker-dealers to work with your retirement accounts, and many firms are choosing to send their smaller accounts packing. Some are making the statement that this is hurting those clients because they are not getting financial advice, but was that kind of advice really worth getting? Others are setting up automated, “robo-advisors” to automatically feed your through their computer system and still collect their check at the end of the day.
Maybe we are a bit biased, but we believe that if you call yourself an advisor then you should be expected to provide open and trustworthy advice. A cook should eat their own cooking, and we should be treating our client's money like it was our own. We should make money when our client's make money, not by charging expensive commissions up front and then forgetting about them. We believe in giving prudent advice and thankfully for us, have found that many consumers wanted this all along.
So, what should you do when looking at a BICE from your current financial advisor? That answer is ultimately up to you, but if you're unsure and want a second opinion, we would love to gain an understanding of your needs and guide you in the right direction.