As 2016 draws to a close, advisers are normally preoccupied with the yearly wirehouse payout tweaking rituals.

"The fiduciary rule is more than 1,000 pages long, and it may be subject to interpretation for a very long time," says recruiter Mark Elzweig.

But this year is different.

All eyes are focused on how broker-dealers will respond to the new fiduciary rule adopted by the Department of Labor this year. The key question: Will broker-dealers allow advisers to avail themselves of the best interest contract exemption so they can make commission trades in retirement accounts?

Under the fiduciary rule, retirement accounts must be fee-only. The exemption gives financial advisers some wriggle room, at least in theory.


Let's say a firm says that it will approve use of the exemption. The next questions are: What kinds of products will be available for the exemption and how much can advisers charge clients? These decisions could be game-changers for advisers – prompting them to move or stay put depending on what they consider to be best for their practices.

Firms are already aligning themselves on either side of the exemption divide. Merrill Lynch and independent broker-dealer Commonwealth Financial Network have said that they will not allow commission-based products in retirement accounts. Morgan Stanley, Raymond James, and Ameriprise will allow advisers to use the exemption – but have not yet specified which products will be included.

From conversations with industry insiders, it is becoming clear that exemption policies are likely to be fluid. The fiduciary rule is more than 1,000 pages long, and it may be subject to interpretation for a very long time.

The new rule presents broker-dealers with a quandary. They would ideally like to provide their advisers and clients with maximum flexibility and choice of investment products. But the fiduciary rule may place them in the crosshairs of plaintiffs' attorneys. A broader, more expansive exemption could invite class- action lawsuits against firms. That means brokerages must figure out how to give advisers and their clients leeway in their investing choices without opening themselves to legal challenges.


For those firms that opt to allow the exemptions, the ground is likely to be ever-shifting. A number of investors are grumbling that they won't be able to trade stocks in their retirement accounts – which many retirees enjoy doing. Many clients are also griping about the prospect of paying fees for former buy-and-hold stock and bond portfolios.

Firms will shrink their willingness to grant the exemptions and their menus of permitted products if the courts hand out big judgments.

One hopeful sign for the brokerage industry is the election of Donald Trump. He will likely appoint pro-business regulators who are less antagonistic to commission business. Even so, it will take a new crew of regulators a while to develop their own guidelines for the implementation of the fiduciary rule – or repeal it. In the meantime, advisers need to drive defensively.

A firm’s best interest contract exemption policies today might not be the same as those tomorrow. The message regulators have delivered in 2016 is caveat venditor – let the seller beware.

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