Best Interest Contract…Your Needs First!
What exactly is a “BIC”?
Nate Lovik, AIF® Investment Advisor Representative
Many of us have used a BIC® for such things as lighting a candle, firing up the grill, or having a smoke. Moving forward, you may hear your financial advisor reference a BIC, and it won’t be for lighting anything on fire. As part of the Department of Labor ruling regarding how retirement accounts are treated, a new acronym has been created known as BIC or Best Interest Contract. The aim for this blog is to outline why BIC is important and what it means to you as a client.
First things first, what prompted the origin of “BIC”? The Department of Labor over the last six years has drafted sweeping regulation to ensure anyone working in some sort of financial advisor capacity to act in the best interest of a client, hence BIC or Best Interest Contract. For many the thought that their financial advisor wasn’t already acting in their best interest seems absurd. Truth be told, most advisors truly do have their clients best interest in mind, but let’s be honest, many people employed in financial services work on commission and this means pushing an agenda
Let’s look at the elements of a BIC.
1. Acknowledge Fiduciary Status: The advisor will state in writing that he/she will act in a fiduciary manner for the client.
2. Best Interest of Client and Beneficiaries: The advisor must act “prudently” meaning they follow the “prudent” person rule
3. Reasonable Compensation: Defined by Nature (how complex is the advice?), Scope (how involved? One account, multiple accounts?), and Frequency (how often? quarterly, annually, etc.)
4. No Misleading Statements: Sales illustrations must be fair and balanced.
5. Disclose all “Material Conflicts of Interest”: Full disclosure of ANY conflicts that may influence fiduciary responsibilities. i.e. bonuses, proprietary products, additional compensation.
As the rule stands today, a BIC will need your acknowledgement anytime money is rolled out of an ERISA governed plan (think 401K). So moving forward, if you leave an employer and your advisor suggests rolling money into an IRA, chances are you will sign a BIC.
So what does signing a BIC mean? For a financial advisor (used loosely as many “advisors” are nothing more than product pushers) having a signed BIC means the client agrees that a rollover makes sense and they agree to the terms. In reality, as a client to the advisor, you’re signing off that all conflicts have been disclosed and you’re comfortable with the compensation the person recommending will receive. In my humble opinion, the BIC doesn’t guarantee anything to ensure you as the client’s best interest are truly put first. For instance equity index annuities have been placed on high alert as products generally not best suited for clients due to their complexity and substantially higher commission payouts for advisors. By signing a BIC and purchasing a product such as these equity index annuities, it may be harder to hold the person selling it responsible if litigation was ever involved.
The moral of the story is when working with financial advisors, is for you to have a thorough understanding of what you’re buying and how the person recommending advice/products intends to receive compensation. If he or she offering the advice cannot deem themselves a fiduciary for ALL aspects of their business, I’d recommend getting a second opinion. Generally speaking, working with a CFP®, AIF®, or a fee-based investment advisor already held to a fiduciary duty would increase your chances of ensuring that your interests are put first.
For more on the Department of Labor fiduciary rule click here: http://www.investopedia.com/updates/dol-fiduciary-rule/