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May 05, 2016 at 01:46 AM
Much attention has been given to the DOL’s new fiduciary rule for retirement plans, IRAs and rollovers. In particular, people have focused on the requirements for the Best Interest Contract Exemption (BICE), which applies to compensation received for recommendations of investment and insurance products.
While the BICE requirements are substantial, they are placed primarily on the “financial institution” (for example, the broker-dealer or RIA firm). The BICE requirement for individual advisors is much more limited.
Those limited requirements for advisors are the subject of a future posting.
While the burdens imposed by BICE are substantial, it appears that many people are overlooking the equally significant impact of the best interest standard of care. The “best interest” standard is a combination of ERISA’s prudent man rule and duty of loyalty.
While advisors to ERISA plans are familiar with the prudent man rule and the requirement for a prudent process, that will be a new concept for IRAs and rollovers, when the rule becomes effective on April 10, 2017.
Generally stated, the prudent man rule requires that an advisor engage in a prudent process which takes into account qualitative and quantitative issues related to investments, the needs of the investor, the purpose of IRAs (that is, as retirement vehicles), and so on.
The advisor’s conduct is measured against that of a hypothetical person who is knowledgeable about those issues and who reaches an informed and reasoned decision. For example, under ERISA a fiduciary is required to apply generally accepted investment theories and prevailing investment industry practices. Some generally accepted investment theories are: modern portfolio theory; strategic asset allocation; diversification of investments and asset classes; and so on. Based on my experience, many IRAs are not invested in a manner consistent with that approach.
