Is it Possible to Be an Advisor Without Being a Fiduciary?

In his most recent (62nd, but who’s counting?) blog post regarding the Department of Labor’s fiduciary rule and exemptions, Fred Reish poses an intriguing question.

He notes that under the new fiduciary definition (which applied on June 9), an investment “suggestion” is fiduciary advice, a broad definition that arguably includes suggestions about a range of issues, including investments, insurance products, investment strategies, other investment advisors and managers, IRA transfers and plan distributions.

Reish says that the breadth of the definition makes it almost impossible to be an advisor to a plan without becoming a fiduciary. He notes that under the new definition, where an advisor provides information about investments, it’s “possible, perhaps even probable, that the advisor would reasonably be viewed as having suggested that the plan sponsor, participant or IRA owner choose the investments. Otherwise, why provide information about those specific investments … unless it was a suggestion that the retirement investor select one or more of them?”

Reish then notes that in the context of a 401(k) plan, it is possible that for a new plan or for a plan changing recordkeepers, the recordkeeper would provide a list of investments in response to an RFI or RFP. “If properly done, the list will not be fiduciary advice – because of a fiduciary exception for recordkeepers,” he explains, going on to caution that, in turn, “if the advisor does not comment on the list, either favorably or unfavorably, the advisor would not be viewed as having provided fiduciary advice.”

Reish goes on to point out that, in that case, at future meetings with the plan sponsor, the advisor or the recordkeeper could simply provide information about the existing investments. Not that there aren’t circumstances that merit caution; Reish explains that it is feasible that an advisor would not make comments about poorly performing investments which could be viewed as “suggestions” that they be removed – and, if those suggestions are made by an advisor, it could be fiduciary advice. Similarly, a plan sponsor/fiduciary needs to remove an investment option from the plan, a plan sponsor needs to select a replacement investment. “Who will provide the potential replacement investments to the plan sponsor?” Reish asks. “If the advisor does, that could be a suggestion, or fiduciary advice, that one of those replacement investments be used.”


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Alternatively, he comments that some broker-dealers may decide that their advisors can only use recordkeepers that include fiduciary advisers on their platforms, and that those platform advisers would then recommend or select a plan’s investment lineup (and, in the future, would remove and replace investments, as appropriate). “That might work,” he opines, but goes on to caution that the recommendation of a third party fiduciary investment adviser or manager is also a fiduciary act. “So, while the advisor would not be a fiduciary for the recommendation of investments, the advisor could be a fiduciary for “suggesting” that the plan sponsor use a fiduciary on the recordkeeper platform,” he writes.

“Unfortunately, these issues have not been tested in the courts or in FINRA arbitrations … so, it’s almost impossible to tell where the line will be drawn. As a result, broker-dealers and RIAs need to decide whether they will take the position that they are not fiduciaries – and be subject to risk, or whether they will take a conservative position and clearly be compliant,” he concludes.

He notes that while these rules apply to both ERISA retirement plans and IRAs, the issue is particularly acute for plans, in that a service provider to plans must state in its 408(b)(2) disclosures whether it is serving as an ERISA fiduciary.

He notes that the new rules have a number of unforeseen applications, and with the likely delay of the applicability dates of the exemptions, including of the full and final Best Interest Contract Exemption, this is a good time to think about how these rules apply and what changes need to be made.

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