Under ERISA, a fiduciary is a person who has discretionary authority over the management of the plan, or a person who “renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has the authority or responsibility to do so.” Previously, solicitors were not fiduciaries because they were receiving fees in exchange for referrals and, as such, were not rendering investment advice.
Under the Department of Labor’s fiduciary rule, solicitors will be considered fiduciaries for recommendations made in connection with ERISA-covered plans and IRAs. The revised definition of “investment advice” under ERISA includes “recommendations on [the] selection of other persons to provide investment advice or investment management services.”
For new solicitor relationships, referral compensation would be a prohibited transaction, absent an exemption. This would subject the solicitor to onerous requirements in order to align its interests with those of the client under the terms of the Best Interest Contract Exemption (BICE), including voluminous disclosures, a website, and full policies and procedures tailored to mitigate conflicts of interest.
One way to potentially avoid the prohibited transaction issue is through a “co-advisor” relationship. A solicitor relationship is not prohibited simply because the solicitor is now considered a fiduciary, but rather because ERISA generally prohibits fiduciaries from engaging in self-dealing and receiving compensation from third parties in connection with transactions involving qualified plans and IRAs.
The advisory duties would need to be bifurcated between each co-advisor. A co-advisor solicitor could potentially introduce a client to an advisor for the purposes of managing the client’s ERISA-covered assets. After the client is engaged, the advisor and co-advisor would service the client in joint, though distinct, roles. For example, the advisor could handle all aspects of the investment process, while the co-advisor solicitor could handle the client services and relationship management aspects of the engagement. As long as the roles were distinctly delegated to each party, and each party’s separate compensation was reasonable in light of the services provided, the arrangement should satisfy this obligation.