More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
On Sept. 19, 2011, the Department of Labor (DOL) withdrew proposed regulations that would have updated and expanded the definition of advisors who are considered fiduciaries to a retirement plan.
At first blush, this withdrawal may seem like relief to advisors who do not want fiduciary responsibility or whose broker-dealers prohibit them from accepting fiduciary status. A word of caution is in order, however. Not only does the DOL intend to repropose the regulations in mid-2012, the number of advisors who accept fiduciary responsibility to gain market share has increased. Advisors who fail to adapt to this reality may lose traction in the marketplace.
The marketplace now offers extensive fiduciary solutions to advisors. Investment organizations, along with many RIA firms, offer to assume fiduciary status (for a fee) so the advisor can be freed up for other functions. These companies provide services such as specific investment menus for employers and managed account solutions to participants, where they make specific allocation recommendations based on participant data.
Advisors who partner with companies that offer these solutions have made fiduciary responsibility a major discussion item with employers. This allows partnering advisors to demonstrate their value and differentiate themselves from those in the market who prefer not to assume fiduciary responsibility.
These advisors look at the delay as a non-event, as they are already gaining an edge in the market by providing a fiduciary solution.
Those advisors who do not want to be considered a fiduciary and who do not offer employers solutions to mitigate their responsibility, may increasingly find themselves on the outside looking in when employers make their ultimate decision in selecting an advisor.
Another way the fiduciary discussion will be brought to the employer’s attention is with the imminent implementation of the Service Provider Fee Disclosure Regulations under ERISA Section 408(b)(2), which will now be effective July 1, 2012. One requirement of the new rules is that investment advisors who serve as fiduciaries to the plan must state this fact in writing in the required disclosure. Failure to do so will be deemed a prohibited transaction and the advisor would be forced to forfeit his or her fees.
This, of course, will lead advisors who already acknowledge fiduciary status to make sure employers know they provide this added value. Advisors who don’t offer to be a fiduciary will increasingly have to offer solutions or hope that the prospect (or current client) is satisfied with retaining all the liability for investment decisions.
While the DOL’s new definition of fiduciary is temporarily delayed, the marketing of such services and solutions will continue and probably increase. Those who currently serve as advisors to ERISA plans will find themselves in one of the following three categories:
- Advisors who assume fiduciary responsibility for investments
- Advisors who don’t assume fiduciary responsibility, but who team with companies that do
- Advisors who don’t assume fiduciary responsibility or team with those companies do, thereby leaving the plan sponsor with full responsibility
Advisors in the last category must have a strong value proposition to demonstrate their worth, or they may find themselves at a disadvantage. The DOL’s delay in implementing new regulations may not offer relief as much as an opportunity to adapt to the changing environment.
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