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‘BIC Lite’ and IRA Transfers

Much attention has been given to the new fiduciary rules (applicable April 10, 2017) for recommending distributions from retirement plans and rollovers to IRAs – but what about a recommendation to transfer an IRA from another adviser? Fred Reish takes on the issue in a recent blog post.

Reish starts his analysis by noting that the fiduciary regulation says that a recommendation to transfer an IRA is a fiduciary act. More specifically, he notes that it says that fiduciary acts include “recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.”

Next he says you need to understand that the recommendation will almost necessarily result in a financial conflict of interest – a prohibited transaction. A prohibited transaction for which, fortunately, there is an exception, so long as certain conditions are met. This, of course, is under the Best Interest Contract Exemption, or BICE.

Reish explains that where the adviser making the recommendation is a “level fee fiduciary,” the new requirements are sometimes referred to as “BIC-lite,” because only certain of the requirements of the BICE must be satisfied. Among those requirements are that the adviser receive only reasonable compensation, that no misleading statements be made, and that the recommendation to transfer the IRA satisfy the best interest standard of care.

However, what he characterizes as the most demanding requirement is that the adviser document why the recommendation is in the best interest of the investor, more specifically (quoting from the exemption language) that “the Level Fee Fiduciary documents the reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee.”



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Reish notes that to do so, the BIC specifically requires that the adviser consider the services offered in the existing IRA and the services that the adviser will offer in the new IRA, and that in that regard, he thinks it would be risky to document the “best interest” recommendation without some specific consideration of the services. He goes on to explain that the rule more generally requires that the adviser act in the best interest of the IRA owner, which could involve other considerations, and that the best interest standard also requires that the adviser consider the needs, circumstances, objectives and risk tolerance of the IRA owner.

While Reish says that there could be a number of ways of satisfying the requirements, one way is to have procedures, forms and services for gathering and evaluating the information and for documenting why the analysis of that information results in a recommendation that the transfer (or not transferring) is in the best interest of the IRA owner. As for situations where the adviser will not be providing “level fee fiduciary” advice to the IRA, Reish says the logical conclusion would be that the requirements are the same (in addition to satisfying the other conditions of BICE that do not apply to level fee fiduciary advice).

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