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/

Many companies establish retirement plans without thorough understanding of their fiduciary responsibilities. Understanding your fiduciary role as plan sponsor is paramount due to the risk associated when offering an ERISA regulated retirement plan. A fiduciary that breaches any obligation can be held liable, even if the breach of duty wasn’t known or intended. Ignorance or lack of expertise will not be a sufficient defense in the event of litigation.

What are your fiduciary duties?

The primary duty of all ERISA fiduciaries is to act in the sole interest of the plan and its participants and beneficiaries. The plan fiduciary must:

• Act with the care, skill, prudence and diligence of a prudent person who is familiar with retirement plan matters.
• Follow the plan documents.
• Pay only reasonable plan expenses.
• Diversify plan investments.
• Avoid conflicts of interest.

How can liability be shared or transferred?

• Fully document steps taken to select prudent investment managers.
• Regular monitoring of plan expenses for reasonableness.
• Allow participants to manage their own accounts.
• Avoid prohibited transactions.
• Bonding to protect against acts of fraud.
• Partner with an advisor willing to accept greater responsibility.

Who can you partner with to reduce liability?

Some employers may choose to have a “hands-on” approach and do the investment selection themselves; others may wish to delegate the task entirely. Dependent on the role of the advisor, you as the plan sponsor may be accepting a higher degree of risk. Distinct advisor roles can facilitate the plan functions and offer solutions that may alleviate risks the employer is unwilling to accept.

For more information regarding fiduciary responsibilities from the Department of Labor website, click here. 

Nate Lovik, AIF®

Investment Advisor Representative

RDAFN.COM 2522 22nd Ave SE, Rochester, MN 55904 (319) 325-7854 or (888) 300-4975. Securities offered through United Planners Financial Services, Member FINRA/SIPC. Advisory services offered through RDA Financial Network, a Registered Investment Advisor. United Planners and RDAFN are not affiliated.

Most common forms of retirement vehicles include: Roth IRA’s, 401(k)’s, and Traditional IRA’s. These are but a sample from the entire retirement vehicle “garage”, and accessible to most of the general public. The plans mentioned all share one common characteristic that offers tremendous benefit to the individual; tax-deferred growth. The aforementioned plans utilize tax-deferral as the Internal Revenue Service deems them “qualified plans”.  For the long haul of retirement planning, utilizing tax-deferred growth via a qualified plan relieves the investor from taxes until withdrawals occur during retirement. For an example of tax-deferred versus taxable, please click the following link:

https://3.bp.blogspot.com/-suvfGBrD8HQ/V75vNqKJetI/AAAAAAAAAJI/Uvis3JePWYAPwsqoCFnQPqMn0HnpL-5nQCLcB/s640/Taxable-and-TaxDefer.png

While the aforementioned vehicles all offer tax-deferred growth, critically understanding how and when taxes are applied take precedence. Traditional IRA’s and 401(k)’s generally offer an upfront tax break. For example, a person earning $50,000/year contributes $5,000 to her 401(k) she will effectively lower her taxable income to $45,000. The tax benefit realizes immediately in this example. Now the IRS is smart, they won’t let you have your cake and eat it too. Once in retirement, or at least by age 70.5, a Traditional IRA account holder must begin withdrawing funds from the IRA which will be considered taxable income.

Alternatively to Traditional IRA’s, the ROTH IRA tax benefit functions in the opposite. A contribution to a ROTH receives NO initial tax break, the tax relief occurs during retirement. Under certain conditions (click here for details) Roth IRA distributions are tax free. For individuals planning on higher income during retirement can strongly benefit from the Roth IRA vehicle. No requirement exists for mandatory withdrawals from a Roth, yet another reason to consider when planning.

Ultimately the choice between tax savings now or tax savings later, determines which vehicle to pull from the garage. Alongside your financial advisor, a solid accountant can facilitate the decision of which option is viable for you.

Nate Lovik

Invesment Advisor Representative

Why bother creating an estate plan? For starters, dying without a plan (or will) in place means you have died “intestate”.  In plain English this means your possessions will now be passed on through the court system of your home state. If you’re not okay with complete strangers divvying out your assets or have an extra needs child requiring care and wish to have a trusted family member provide care, creating an estate plan is imperative.

Three distinct tools exist to plan for one’s passing of an estate; beneficiary designations, wills, and trusts all facilitate the transfer of assets while hopefully saving time and money for your heirs.

Beneficiaries: The most basic step to planning your estate. Naming a beneficiary to assets such as IRA’s or bank accounts, assets can transfer without the need of probate. A common term for this is “Transfer on Death” literally meaning that a beneficiary will receive the asset once they have a death certificate to commence the transfer. This can be helpful in the event that final expenses (funeral costs, medical bills, outstanding debts, etc.) can be handled by the decedent’s executor in a timely fashion. Reviewing beneficiaries on a regular basis (yearly or after life events, for example) is highly recommended. For example, a person divorces and remarries without updating beneficiaries, this person then dies leaving their assets to the previous spouse probably won’t go over well!

Wills: In essence, the legally documented will provides a list of “who gets what” when a person passes away. Physical possessions such as a vehicle, heirlooms, money, etc. can be named to a beneficiary within the will. While the will provides direction of assets after death, the probate process still occurs. Heirs to an estate must note that any outstanding debts of the deceased are open to creditors for collection (for a certain period of time) and in some cases, heirs may be “disinherited” if outstanding debts outweigh the value of the estate. Another crucial part of a will pertains to parents of minor children. For instance, in a simultaneous passing of parents without a will, the courts determine who will take custody of their minor children, thus naming a “guardian” within a will can offer peace of mind knowing that the state won’t appoint a complete stranger to foster the children. Coinciding with beneficiaries, reviewing a will on occasion is critical.

Trusts: For those that truly wish to dictate how assets are handled at death, the creation of a trust can simplify the process. A trust, in a way, is a living document that can act as if the deceased person remained alive to provide instruction perpetually in some cases.  A “trustee” is named at creation of the trust and must adhere to carrying out the provisions of the trust. In retrospect to a will, trusts can avoid the probate process and more than likely save time and money by abstaining from the court system. Another benefit is that almost anything can be named to a trust. A vacation home in another state, life insurance proceeds, etc. can all be the beneficiary of a trust. At passing, a properly designed trust can literally contain all the assets of the deceased and the trustee will have instant access to properly divide the assets amongst beneficiaries.

Quick Comparison:

Probate

• Public disclosure of your assets
• Court approved Guardians/Conservators
• Potentially expensive costs
• Controlled by court

Trust

• No probate
• You appoint who handles your assets
• You appoint guardians
• Privately controlled
• Perpetuity of control

A comprehensive total of your assets, including life insurance (which is included in estate taxation) are critical to planning for your estate. If you could care less what happens at your passing, disregard any of this article and let the courts do their job. However, if you wish to have control and better ensure your loved ones are cared for financially after your passing, seeking legal counsel is the first step to creating a plan.

Nate Lovik

Investment Advisor Representative

12-20-2016

Though it might be awhile before we notice anything any benefit from interest on our bank deposits, a rate hike would be a step in the right direction. For a more in depth explanation of the effect of rate increases, please check out the information provided on Investopedia below:

How Interest Rates Affect The Stock Market

11-29-2016

Nate Lovik Investment Advisor Representative