Satisfying the Best Interest Standard

In his latest blog post on the fiduciary regulation, Fred Reish examines the components of a “best interest” process.

The first step of a best interest, or prudent process, is to determine the information that is “relevant” to making a decision that is “informed.” In other words, Reish explains, what would a person who is knowledgeable about such matters, and who is unbiased and loyal to the IRA owner, want to review in order to develop a recommendation?

Review View

While he laments that there aren’t any specific guidelines in the fiduciary regulation or BICE, Reish notes that it seems reasonable to conclude that, at the least, the following would be required in most cases:

  • The investments, services and expenses in the current IRA.
  • The investments, services and expenses available in the IRA that the adviser will recommend.
  • The needs, objectives, risk tolerance and financial circumstances of the IRA owner.

While he notes that that may be enough in a “typical” case, he acknowledges that there may be special circumstances that would require considerations of additional factors.

Once those considerations have been identified, Reish says that the next step is to gather the information (ensuring that the documentation is retained in retrievable fashion in the event of SEC or FINRA examinations, IRS audits, or private claims), and then to analyze the information. As an example, he says that if the investments and the expenses are similar for both the current IRA and a new IRA, the key is to consider the services in light of the needs and circumstances of the IRA owner. Indeed, Reish notes that in this new fiduciary world, advisers and their supervisory entities should focus on the services that they will provide to retirement money.

Service Standard

“Generally speaking, the investment of retirement money (at least, based on guidance from the Department of Labor) involves considerations of generally accepted investment theories,” Reish writes, citing examples like modern portfolio theory, and of prevailing investment industry standards, strategies such as asset allocation, diversification among and within asset classes, and portfolio construction. “Those are ‘services’ that are consistent with the best interest standard of care and that could justify a prudent, or best interest, recommendation to transfer an IRA,” he continues.

Ultimately it’s important that “the appropriate documentation be gathered, a thoughtful analysis be made, and the recommendation be prudent and loyal,” he notes.

“The best interest fiduciary process is a new way of looking at everyday transactions and making recommendations about those transactions. It’s important for advisers to realize that it’s not just a compliance issue; instead, it’s a process… a thoughtful, documented, best interest process.”

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