A motivational staple of our industry, the top producer’s award trip, could be dramatically diluted or fade into obsolescence due to the fiduciary rule.

The new rule discourages all forms of incentives that may conflict with an adviser acting in the best interests of retirement clients. According to the DoL, the financial institution must adopt “measures reasonably and prudently designed to prevent material conflicts of interest."

Specifically on the best interest contract exemption, the DoL said: "The financial institution's policies and procedures require that neither the financial institution nor (to the best of its knowledge) any affiliate or related entity use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or would reasonably be expected to cause advisors to make recommendations that are not in the best interest of the retirement investor.”

Scott Stathis, managing partner of consulting firm Stathis Partners, says that banks and independent advisory practices both stand to benefit from teaming up.

In the context of award trips, the following question is unavoidable. If some product partners of a bank or broker-dealer pay that organization in support of an awards trip (and by default participate in the trip) are the organization’s advisers more likely to recommend products from those partners versus the product partners that didn’t financially support in the awards trip?

Moreover, when comparing two product partners that both support award trips, will the partner that spends more lavishly get more attention from advisers?

We have explored this issue in several ways over the past two months by asking bank and credit union channel executives the following question: Has your firm determined that it is okay to accept “soft” marketing dollars from product partners for things like award trips once the rule takes affect?

This question was asked in an industry survey, polled during an industry webinar, discussed during our executive forums, and asked again in one-on-one phone interviews. Overall 71 institutions answered this question in one form or another. Here is the result:
● 62% have yet to make a final determination on acceptance of soft marketing dollars.
● 20% have determined that they will no longer accept soft marketing dollars.
● 12% are exploring “other” work-arounds
● 3% will continue to accept soft marketing dollars with no changes to current policies.
● 3% will continue to accept soft marketing dollars but will require the BICE to disclose.

Many of the “other” respondents that are exploring workarounds are still in a gray area of indecision. Consequently, if you back out the “TBDs” and the “others” the revealing fact is that 80% of the institutions that have made a definitive decision will no longer be accepting soft marketing dollars. The remaining 20% will continue to accept soft marketing dollars, 10% of which will require a BICE, and 10% with no changes to current policy.

One of the organizations that will continue to accept soft marketing dollars stated that use of those dollars will be restricted in use to training, education, due diligence, rather than award trips or activities that may result, or appear to result, in a conflict of interest.

OPTIONS AND WORKAROUNDS
The top producer award trips have become such a staple in our industry that there is a reluctance to simply do away with it. Many organizations are assessing various ways to keep the trip in a modified form.

One option mentioned several times during our research is to roll the trip into the bank’s existing awards trip. The concern with this option, however, is that the number of qualifiers will be significantly reduced and the nature of the trip would be very different.

Another option is to self-fund the trip, but this would mean dramatically reducing the overall quality and size of the trip.

One executive voiced an interest in having product providers figure out if there is a way to break out marketing dollars for only non-qualified accounts, but that may be as effective as no-smoking sections in restaurants used to be.

Another work-around discussed is charging product providers a shelf-space fee for their products to be sold through the retail investment services organization. However, there are several potential problems with this strategy. One is that the charge would have to be the same for each product provider to reduce the possibility of scrutiny. Another is that if there is a product provider that has products that potentially meet the best interests of your client base better than ones already represented, but they are unwilling or unable to pay the shelf-space fee, then that may represent a material conflict of interest.

The best example of a shelf space fee is the practice of slotting fees in grocery stores. A slotting fee is a fee charged to product providers by a supermarket to have their products placed on their shelves. In this example, the fee varies greatly depending on the product, manufacturer, and market conditions. Also, those that pay higher fees get better eye-level placement on the shelves since eye-level placement sells more product. Some argue that slotting fees are unethical as they create a barrier to entry for smaller businesses that do not have the cash flow to compete with large companies.

Utilizing any similar strategy in retail investment services in a way that doesn’t conflict with fiduciary standards could be difficult.

Obviously, if your firm plans to accept soft marketing dollars (especially if you don’t use the BICE) you must be able to make a very strong case that the acceptance of these marketing dollars, and the way those dollars are used, present no conflicts of interest and don’t cause advisers to make recommendations that are not in the best interest of the retirement investor. Ideally there would be no correlation between product partners that financially support your award trips and an increase in the sales of their products by reps in your organization.

Two bank executives we talked to also felt that if the amount of monetary support that is received from a product provider is immaterial when compared to product sales revenue generated by the bank from that provider, then the bank is compliant. We're not convinced Elizabeth Warren would agree.

As is typically the case with principals-based regulatory rules, there are many elements open to interpretation, and final determinations may be made in the courts. Obviously, in this case, good faith must be shown to avoid conflicts of interest. However, in the final analysis how much risk a firm wants to take with their interpretation of the rule when it comes to questions like whether to accept soft marketing dollars for award trips, and whether to use the BICE if you do, comes down to the risk profile of the firm. So you better do a good job assessing that risk profile.

Sound familiar?

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