The Labor Department has long taken the position that the recommendation of a discretionary investment manager is a fiduciary act, notes Fred Reish in a recent blog post. But what about recommending an adviser?
Reish notes that in the former situation, and from a legal perspective, if the person making the referral is a fiduciary and that person receives a fee, that may be a prohibited transaction under ERISA and the Internal Revenue Code.
But when the new fiduciary rule becomes applicable on April 10, 2017, Reish explains that the definition of “fiduciary” will cover someone who makes referrals to both discretionary investment managers and non-discretionary investment advisers for plans, participants and IRAs.
That means, Reish explains, that a person who recommends a fiduciary adviser (which could include financial advisers, insurance agents and investment advisers under the new definition) will be a fiduciary for that purpose if a fee is paid for the referral. Furthermore, the payment of that fee could be (or probably will be) a prohibited transaction.
“This is a significant change. Advisers who pay fees for referrals should consider its impact,” Reish notes.
