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Neutral Factors and Adviser Compensation

If neutral factors are used to determine the relationship of compensation between different categories of investments and services, how is the compensation determined?

In a recent blog post, ERISA attorney Fred Reish opines that the best way to approach that question is to look at a single reasonably designed investment category; the compensation of the adviser cannot exceed a reasonable amount (based on the services rendered) and the adviser’s compensation must be level regardless of which products are recommended… and regardless of the payments made to the adviser’s supervisory entity (e.g., broker-dealer or any affiliate or related party).

“Level” is a fairly easy-to-grasp concept, but Reish comments that “reasonable” is a bit more difficult. The DOL says that reasonable compensation is based on market data – in an open, transparent and competitive market. Reish notes that the easiest way to obtain that information is through a benchmarking service.

That said, he cautions that it is important to review the reasonableness of compensation at least every two or three years – and that, as the marketplace has matured, the level of reasonable compensation has become “lower and lower.”

He notes also that when a prohibited transaction exemption – such as BICE – is being used, the burden of proof is on the person claiming the exemption – that is, the adviser.