The Department of Labor's new fiduciary rule requires retirement account advisors to hold themselves to a fiduciary standard. In brief, that means they must always put the clients' needs above their own. Fiduciary rules limit the kinds of fees that fiduciaries can collect, but the Department of Labor has provided an exception to give retirement advisors more flexibility.

Unfortunately, this exception can become very expensive for retirement savers.

Best-Interest Contract Exemption (BICE)

Fiduciary rules don't allow advisors to collect any kind of variable compensation; they're limited to fixed fee reimbursements only. That's because variable compensation creates an inevitable conflict of interest for advisors. If an advisor sells two different products, one of which earns him a $100 commission and the other of which earns him a $10,000 commission, he's highly motivated to recommend the second product instead of the first -- even if the second product isn't the best choice for his clients. Indeed, financial products that pay enormous commissions to advisors often do so because the advisor would be unlikely to recommend them otherwise.

The problem with the fixed-fee-only rule is that it bars retirement advisors from recommending products that would generate commissions, which can make it nearly impossible for these advisors to provide complete and thorough financial guidance. So the Department of Labor has introduced the Best-Interest Contract Exemption (BICE) as a way to get around this issue. By using the BICE, retirement advisors can recommend products associated with the forbidden types of fees, so long as they follow certain guidelines.

Brochure for Individual Retirement Accounts

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The BICE requirements

In order to use the BICE when advising IRA holders, retirement advisors must prepare a special contract between themselves and the investor. The contract must acknowledge that the advisor is a fiduciary and that their advice is solely in their client's best interest. It also has to include some warranties from the advisor's financial institution -- the institution must have policies holding advisors to impartial conduct standards, promising not to set sales quotas that would encourage advisors to act against their clients' best interests, and so on. This contract is not required to advise 401(k) investors -- just IRA holders.

The BICE also has some enhanced disclosure requirements, which means investors are likely to be buried under even more fine print. And advisors have to prepare documentation proving to the Department of Labor why the advice they gave was in fact in the client's best interests.

How the BICE may affect you

If you have an IRA and work with a retirement investment advisor, he or she may ask you to sign a BICE contract before agreeing to advise you. If you choose not to sign this contract, you'll need to find another advisor or an alternative such as a roboadvisor. But if you do sign the contract, you will be exposing yourself to much higher fees. The BICE allows retirement advisors to charge fees such as sales loads, 12b-1 fees, revenue-sharing payments, and a wide range of commissions. And because BICE requirements will cost firms a fair amount of money to implement, you can expect those costs to be passed on to you in the form of higher fees.

Bottom line: Think long and hard before signing a BICE contract, and consider alternative sources of advice before you commit.