There were a number of excellent comments to my last blog, “For IRA Investors, a Warning on DOL’s Fiduciary Rule,” including a tome-like tutorial by Ron Rhoades on “best interest” and “sole interest” standards as they apply to the new DOL rules, which I highly recommend that you read in its entirety if you haven’t already done so. Some of these comments warrant comment or clarification — or simply deserve to be highlighted.
[Editor’s note: Some of these quotes have been lightly edited for typos and clarity.]
First, let’s clear up a misconception of my own making. Frank Prazma commented in part: “Sole interest means no compensation and no advice. What kind of strong fiduciary advocacy would that be?” And “AdvisorGuy” chimed in: “Mr. Aikin’s writing clearly states that a sole interest standard basically eliminates compensation to advisors, and would make even disinterested expert advice hard to come by.”
Both Prazma and AdvisorGuy are referring to a quote from fi360 CEO Blaine Aikin’s May 13 blog: “What’s the Difference Between ‘Sole Interests’ and ‘Best Interests?’” which read: “The sole interest standard [in ERISA] is the more rigid standard, requiring that conflicts of interest in a fiduciary relationship be avoided entirely. Strictly speaking, a sole interest standard forbids even mutually beneficial transactions or compensation for the advisor.”
While this makes it sound as if pension advisors can’t be compensated under ERISA, obviously this isn’t the case. I had omitted Aikin’s follow-up comment: “Because of the strict interpretation of a sole interest standard, prohibited transaction exemptions are put into effect to allow for even a minimum of commerce to occur within the confines of the client-advisor relationship.”
In other words, the authors of ERISA felt so strongly about the harmful effects of conflicted advice that they first ruled them out entirely — and then created specific exemptions that detail how each “acceptable” conflict must be handled to mitigate its effect on advice to investors. (A similar format was used by the DOL in its BICE rules for charging sales commissions.)
As Rhoades pointed out, in ERISA “there are 20 statutory exemptions from the prohibited transaction rule, including the main exemption used by fee-only financial advisors, wherein the provision of services necessary for the operation of a plan is permitted for no more than reasonable compensation.” The takeaway here is that pension advisers do get paid, but their compensation must meet reasonable industry standards.