Pershing addresses new conflict of interest regulation
09 June 2016 Orlando
Image: Shutterstock
BNY Mellon’s Pershing is addressing the US Department of Labor’s new Conflict of Interest Rule, developing a range of new solutions to help financial services firms with compliance.
The new regulation is designed to protect individual retirement account (IRA) holders by preventing financial advisors from giving advice that would ultimately benefit the advisor.
According to the Department of Labor’s regulatory impact analysis, conflicting investment advice can cause IRA investments to underperform by an average of 1.5 to 1 percentage point per year. In the mutual funds segment alone, conflicting investment advice could cost investors up to $189 billion over the next ten years, according to the research.
The new rules require retirement investment advisors to put clients’ best interests first and to expand the types of retirement advice that are subject to fiduciary protections. They will also distinguish between activities that are classed as advice and those that are not.
According to Pershing, the changes are likely to drive a further shift towards fee-based advisory relationships, rather than a commission-based model. In response, Pershing is developing mutual fund and exchange-traded fund (ETF) wrap solutions that will offer advisors access to more managed account options.
This should help advisors to serve a wider range of investors, and to provide a more diversified risk-based portfolio with lower account minimums.
Pershing is also working on practice management materials to help client manage the change, and planning tools for transitioning client accounts.
Part of the new regulation entails a best interest contract (BIC) exemption, which allows certain individual advisors to use compensation arrangements that are otherwise disallowed, as long as they commit to putting clients’ best interests first, adopt anti-conflict policies and disclose any conflict of interest that emerges.
In response to this, Pershing is developing services to help firms comply with the BIC exemption through managing contracts, disclosure and controls for supporting compliance.
Finally, in anticipation of a greater need for surveillance, supervision and documentation to achieve compliance with BIC exemptions, Pershing is working on reporting packages and workflows, and looking at ways to allow firms to supervise assets on their platforms.
Rob Cirrotti, managing director and head of retirement and investment solutions at Pershing, said: "While some aspects of the final version of the Department of Labor's Conflict of Interest Rule will be easier to implement than the initial proposal, the essence of the rule is the same and it could profoundly change financial services firms' operating models, compensation arrangements and supervisory structures."
He added: "We've identified various needs that have emerged as a result of the new rule and have been working to develop solutions to help our clients achieve success in this regulatory environment. The combination of our new and existing tools helps our clients operate as fiduciaries."
The new conflict of interest rules are due to come in on 8 April 2017, one year after the final rule was announced on the Federal Register. The BIC exemption rules will come in to effect on 1 January 2018.
The new regulation is designed to protect individual retirement account (IRA) holders by preventing financial advisors from giving advice that would ultimately benefit the advisor.
According to the Department of Labor’s regulatory impact analysis, conflicting investment advice can cause IRA investments to underperform by an average of 1.5 to 1 percentage point per year. In the mutual funds segment alone, conflicting investment advice could cost investors up to $189 billion over the next ten years, according to the research.
The new rules require retirement investment advisors to put clients’ best interests first and to expand the types of retirement advice that are subject to fiduciary protections. They will also distinguish between activities that are classed as advice and those that are not.
According to Pershing, the changes are likely to drive a further shift towards fee-based advisory relationships, rather than a commission-based model. In response, Pershing is developing mutual fund and exchange-traded fund (ETF) wrap solutions that will offer advisors access to more managed account options.
This should help advisors to serve a wider range of investors, and to provide a more diversified risk-based portfolio with lower account minimums.
Pershing is also working on practice management materials to help client manage the change, and planning tools for transitioning client accounts.
Part of the new regulation entails a best interest contract (BIC) exemption, which allows certain individual advisors to use compensation arrangements that are otherwise disallowed, as long as they commit to putting clients’ best interests first, adopt anti-conflict policies and disclose any conflict of interest that emerges.
In response to this, Pershing is developing services to help firms comply with the BIC exemption through managing contracts, disclosure and controls for supporting compliance.
Finally, in anticipation of a greater need for surveillance, supervision and documentation to achieve compliance with BIC exemptions, Pershing is working on reporting packages and workflows, and looking at ways to allow firms to supervise assets on their platforms.
Rob Cirrotti, managing director and head of retirement and investment solutions at Pershing, said: "While some aspects of the final version of the Department of Labor's Conflict of Interest Rule will be easier to implement than the initial proposal, the essence of the rule is the same and it could profoundly change financial services firms' operating models, compensation arrangements and supervisory structures."
He added: "We've identified various needs that have emerged as a result of the new rule and have been working to develop solutions to help our clients achieve success in this regulatory environment. The combination of our new and existing tools helps our clients operate as fiduciaries."
The new conflict of interest rules are due to come in on 8 April 2017, one year after the final rule was announced on the Federal Register. The BIC exemption rules will come in to effect on 1 January 2018.
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