Home Alts News DOL Fiduciary: Direct Investment Leaders Express a Mix of Relief and Caution

DOL Fiduciary: Direct Investment Leaders Express a Mix of Relief and Caution


The direct investment industry breathed a collective sigh of relief after the Department of Labor released the final version of its fiduciary rule last week. The most contested aspects of the rule, the best interest contract exemption, asset list and implementation deadline, were simplified, withdrawn or extended, revealing a more manageable and less compliance heavy regulation than what was expected. While the impacts of the new regulation have yet to be seen, we asked industry leaders to give their thoughts and initial reactions to the final rule and how it may impact the space over the long-term.

The two largest industry associations representing the direct investment space, ADISA and the IPA, lobbied for a less burdensome version of the rule. While the DOL came through with a milder version, there are still significant challenges facing the space.

“From the very beginning, we advocated for the rule to allow financial advisors to recommend alternative products, including those which pay a commission, to certain investors,” said Mike Bendix, the president of ADISA and chief executive officer of broker-dealer DFPG Investments. “At the same time, broker-dealers now face a number of challenges in implementing the exemption and in the economics of serving investors with small account balances under the terms of the new rule.”

Tony Chereso, president and chief executive officer of the IPA, said that the trade group also specifically asked for the asset list to be eliminated, which had effectively banned the investment of qualified money in non-traded REITs, non-traded BDCs or private equity real estate in earlier drafts of the rule.

“We were encouraged by the DOL’s thoughtful approach to incorporating our feedback into the final rule,” said Chereso. “Now that the asset list has been eliminated, the IPA’s primary goal during the implementation period is to help our members comply with the best interest contract mandate.”

Bryan Mick, president of Mick Law P.C., which provides independent due diligence legal services for various broker-dealers and registered investment advisors throughout the country, explained that his clients were primarily concerned with the best interest contract exemption for 401(k)s and self-directed IRAs.

“The final rule…allows the required contract terms to be incorporated into account opening documents, eliminates annual disclosures, and provides guidance to allow commission-based products,” said Mick. “The last one was a big issue for our clients, and frankly if you apply a fee or wrap structure to alternative products, even utilizing a discount rate the cost to the client can be greater than a front-end commission.”

While the long-term effects of the rule are not yet known, many in the direct investment community remain relatively optimistic about the potential impacts to the space, specifically with respect to non-traded REITs and BDCs.

Kevin Shields, founder and chief executive officer of Griffin Capital, said that his initial reaction to the rule was “very positive.”

“In the end, financial advisors, including RIAs, now have a contractual fiduciary duty to their clients and are required to provide greater disclosure around both fees and potential conflicts of interest. Whereas the impact of the new fiduciary standard rule enhances the legal relationship between advisor and client, that, in and of itself, should not necessarily have any impact one way or the other on the direct investment industry – the outcome of the prior version of the proposed rule would have been substantially negative to our industry,” said Shields.

Bendix also believes that non-listed investments will continue to do well in the post-DOL era since they help round out a diversified portfolio and are not correlated to the broader markets.

“[Non-traded direct investments] are just too important in the creation of diversified portfolios,” said Bendix. “I wouldn’t be surprised, however, if there was a temporary slowdown in equity raising for these products as [broker-dealers] and their representatives work through the additional compliance requirements made necessary by the exemption. The bottom line is that the asset allocation choices are not restricted by the new rule, which is a huge positive but we are very early in the process. Companies who are proactive and adapt to change quickly will have a distinct advantage.”

And while the BICE requirements are milder compared to what was originally proposed, some believe that non-traded assets may continue to be under the microscope.

“There will be serious regulatory scrutiny on the use of non-traded assets as compared to their traded counterparts in individual RIAs, with the overriding inquiry being which product is better for the client,” said Mick. “That may be a tough hurdle given empirical historical evidence. I don’t think the impact will be as tough on Reg. D products given that many do not have a counterpart traded investment. In reality though that dichotomy has always existed as the Reg. D investors have the accreditation standard and REIT/BDC investors are subject to the state thresholds on income and net worth.”

The general consensus throughout the industry seems to be relief that the final DOL fiduciary rule did not exclude many direct investments, however, sober caution was also expressed as to the potential long-term impact that will result.

“Our nation’s retirement system must work to benefit all retirement savers,” said John Grady, chairman of ADISA’s legislative and regulatory committee. “It remains to be seen, however, whether the important policy goals sought to be achieved by this multi-year effort will in fact be realized by everyone in the retirement saver community, or whether this action will have the undesirable consequences of depriving some Americans of access to advice and the investment products they need to achieve their retirement goals.”