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April 01, 2010 at 04:00 AM
New rules proposed by the Department of Labor appear to give registered investment advisors (RIAs) a competitive advantage over brokers and those advisors who are dually registered. The proposed rules, released in February, would not only require that all advisors receive a level fee when giving advice, but would also prohibit brokers from giving “off-model” computer advice to plan participants.
The DOL’s investment advice rules apply to both 401(k) plans and IRAs. As explained by DOL, the proposed rule would implement provisions of a statutory prohibited transaction exemption, and would replace guidance contained in a final rule released on January 21, 2009, that was withdrawn by DOL last November. Comments are due to the DOL by May 2.
Since most independent RIAs charge a level fee for their advice they’ve never committed a prohibited transaction under the DOL’s proposal, so the exemption that the DOL has issued doesn’t apply to them. However, under the proposed rules, there are two ways broker/dealers–who generally charge commissions–can get an exemption when providing advice: through a level fee and via a computer model offered by a reputable third party. But unlike the withdrawn investment advice rule, the newly proposed one says that brokers cannot give “off-model” computer advice to participants in 401(k)s and IRAs.
What this means is that “if a broker was sitting down as an advisor with a participant and the [broker] ran everything through a certified, unbiased computer model” and then the participant wanted further recommendations beyond that offered via the computer model, the broker could not offer his personal advice, explains Fred Reish, of Reish & Reicher in Los Angeles, a law firm that specializes in employee benefits law. Under the DOL’s new rule, brokers are not allowed to give personal advice because DOL believes “there aren’t enough safeguards to protect participants” from a broker possibly recommending an investment that would give them a bigger commission.
