While it’s well understood that the recommendation of investments to a plan sponsor is fiduciary advice, what about investment recommendations made to fiduciary advisors?
A new blog post by Fred Reish reminds that that is also considered fiduciary advice, and that since virtually every advisor to a plan, participant or IRA is now a fiduciary, he explains that means that the presentation of sample investment lineups to advisors can be fiduciary investment advice, resulting in a recordkeeper becoming a fiduciary.
That is obviously problematic for the recordkeepers, Reish acknowledges, but he says it is also a problem for advisors and particularly for advisors who are not experienced in working with retirement plans. Though he does note that there is at least a partial solution.
IFFE Exception
Reish explains that the fiduciary rules include an exception for fiduciary advice to “independent fiduciaries with financial expertise.” “Simply stated,” he writes, “an independent fiduciary with financial expertise (or IFFE) is a broker-dealer, RIA, bank or trust company, or insurance company that is willing to serve as a fiduciary and who will, in that capacity, oversee the advisor who is providing fiduciary advice to a plan. This is sometimes referred to as the “wholesaler’s exception,” and it covers recommendations made by recordkeepers’ wholesalers and home office personnel.
This wholesaler’s exception permits recordkeepers to provide investment lineups to fiduciary advisors, but not to plan sponsors. However, Reish notes that in a set of FAQs, the DOL noted that wholesaler recommendations could be made in the presence of a plan sponsor, so long as the fiduciary advisor was also at the meeting.
So, he explains, the recordkeeper (and the wholesaler) can avoid fiduciary status by, for example, initially meeting with the advisor to discuss the investment lineup and then making a presentation to the plan sponsor in the presence of the advisor (or, alternatively, having the advisor make the presentation, but with the wholesaler being able to provide comments and answer questions).
“It’s important to know, though,” he writes, “that it must be clear that the recommendations are being vetted by the fiduciary advisor so that, in a sense, the recommendations are technically fiduciary advice by the advisor and not by the recordkeeper/wholesaler. As a result, advisors should make sure that they approve of the recommendations either before they are presented or at the meeting.”
Reish goes on to note that in his experience, broker-dealers, RIAs, and banks and trust companies will ordinarily serve as fiduciaries for the advice given by their representatives and employees – and that, as a result, recordkeepers and wholesalers will be able to provide investment advice to these representatives without becoming fiduciaries (he says that insurance companies are generally not willing to serve as co-fiduciaries with their insurance agents, particularly independent insurance agents and brokers).
Reish opines that the IFFE exception will likely be embraced by the recordkeeper community and, as a result, the common approach will be to provide investment lineups to fiduciary advisors who are supervised by IFFEs. However, he cautions that that does present an issue for recordkeepers who sell directly to plan sponsors without the use of an advisor.
