The redefinition of the term “fiduciary” by the Department of Labor was treated by some in the industry as tantamount to the second coming of Christ. There were years of discussion and debate ahead of the rule’s release in April about how drastically it would impact advisory practices.
To the contrary, if your firm and its advisors are fee-only (“level-fee fiduciaries” as the fiduciary rule calls it) the impact is minimal. An advisor is a level-fee fiduciary if the only fee received by it and its affiliates in connection with advisory or investment management services to a plan or IRA assets is a “level fee” that is disclosed in advance to the plan or IRA owner. A “level fee” is a fee or compensation based on a fixed percentage of the value of the assets (i.e., AUM-based fee) or a set fee that does not vary with the particular investment recommended.
Knowingly or not, advisors have already been relying on the DOL’s Advisory Opinion 2005-23A when providing rollover recommendations to plan participants. However, the new fiduciary rule supersedes this opinion by identifying any advisor who provides rollover recommendations for compensation as a fiduciary who must avoid engaging in prohibited transactions. If an advisor can increase his or her compensation as a result of a rollover recommendation, it would be a prohibited transaction absent an exemption.
My colleague Max Schatzow shared with me these key points on the impact of the DOL rule on fee-only advisors.