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September 08, 2016 at 06:00 AM
Fee-only registered investment advisors (RIAs) have recently expressed relief that most of the added compliance burden from the DOL fiduciary rule landed on other advisory models.
At the same time, though, they are reviewing their operations for potential exposures.
Making Minor Adjustments
Diane Pearson, CFP, with Legend Financial Advisors Inc. in Pittsburgh, Pennsylvania, says the firm is working to “make sure that we’ve got all of our T’s crossed and our I’s dotted from that standpoint.” The firm works with compliance consultants National Regulatory Services and has been focusing particularly on the investment management services it provides for 401(k) plans. Legend can serve as Section 3(38) and 3(21) advisor for these plans. Pearson says that plan sponsors and investment advisors need to regularly monitor their activities to ensure compliance with the DOL rule. Internally, the firm also has created a checklist of distribution options available to individuals leaving employer-sponsored retirement plans.
Bingham, Osborn & Scarborough, LLC in San Francisco, California, has a dedicated compliance manager and works with consultants Advisor Compliance Associates. Chief operating officer Carol Benz reports that the DOL ruling has not caused any major procedural changes, although the firm is reviewing its communication practices, processes and internal education programs. The area most likely to change is processes, she explains, which will include a checklist for IRA rollovers to “ensure we’re addressing all of the concerns and document things very well. That will, of course, require a lot of internal education and a lot of clear communication.”
Dave Campbell, CFA, oversees Bingham, Osborn & Scarborough’s financial planning area and adds that because the DOL ruling focuses heavily on fees and documentation, the firm is working to “tighten up the documentation portion” to demonstrate compliance and show that any recommendations were in a client’s best interest.
Related:
Survey: advisors fear consequences of DOL fiduciary rule
Potential Blind Spots
Although some RIAs are taking a “we won” approach to the ruling, Jason Roberts, an attorney and founder of the Pension Resource Institute in Manhattan Beach, California, notes that the rule could still trip up complacent RIAs. Previously, RIAs would disclose material conflicts to clients who could then decide if they wanted to work with the advisor. That’s changed under the new fiduciary definition, which is much broader and makes it more likely a recommendation or activity will lead to a prohibited transaction. What’s more, “you cannot cure a prohibited transaction through disclosure alone,” he says.
Roberts gives the example of an advisor discussing a client’s held-away 401(k) accounts. Even though the advisor has not managed or earned a fee on the account previously, if he or she makes a recommendation about distributing the assets, that will be fiduciary advice as of next April. “I’m paraphrasing here but, essentially, you cannot use a fiduciary act to increase your compensation,” he says. “That’s one of the prohibited transactions. It actually sounds pretty dramatic but it’s called self-dealing. I’ve used the authority that made me a fiduciary to make a recommendation to you and I am going to profit from that because I went from zero basis points to 100 in my example. That delta is the prohibited compensation.”
