IRA rollovers, which are an important component of many financial advisors’ business models, can in certain circumstances now be captured within the potentially confusing boundaries of the DOL fiduciary rule, which became partially effective on June 9. 

This means that advisors must proceed with caution when discussing even a client’s existing retirement assets in order to comply with the rule—or, as many would prefer, avoid its application entirely.  What many may not understand, however, is that discussions regarding potential retirement account rollovers need not be avoided simply to prevent application of the fiduciary standard—but once the standard does apply, advisors must exercise care in remaining compliant with the rule’s mandates in order to avoid potential liability.

When Does the Fiduciary Standard Apply?

Under the DOL fiduciary rule, an advisor will generally become subject to the heightened fiduciary standard when he or she provides an “investment recommendation” to the client in exchange for a fee or compensation.  As a result, if the advisor clearly recommends that the client transfer his or her retirement assets to the advisor’s firm (i.e., by rolling over an existing IRA or 401(k) for investment management at that firm), the advisor will become a fiduciary with respect to the client.

It is immaterial whether the advisor receives a direct fee for recommending the rollover—any compensation that the advisor receives as a result of the rollover (including advisory fees and commissions) are sufficient to bring the transaction within the rule.

Despite this, there are many circumstances under which an existing client may approach a financial advisor because the client already wishes to roll an existing IRA or 401(k) into an account that is managed by the advisor’s firm. In many cases, a client may be motivated to consolidate retirement assets with a single advisor either because of a pre-existing relationship with that advisor or because of disappointment with a previous advisor. In these cases, the fiduciary standard should not apply because the advisor never provided an investment recommendation to the client.

Further, advisors are permitted to engage in certain types of discussions that are designed to educate clients without becoming subject to the fiduciary standard.  General plan information can be provided to the client without directly providing an investment recommendation, but the advisor must be careful not to suggest that the assets be transferred to the advisor’s firm and cannot provide biased information. 

For example, the advisor can provide information regarding the plan’s terms, available distribution options, fees and expenses, investments offered within the plan and considerations that investors typically take into account when deciding whether to complete a rollover. Advisors should also consider having clients acknowledge that they did not receive investment recommendations (and make clear to the client that the advisor is not providing such a recommendation) when the information is provided.

Potential Exemptions for IRA Rollover Transactions

In certain situations, of course, the advisor actually will provide investment recommendations in order to gain a client’s business—thus subjecting the advisor to the fiduciary standard, which requires that the advisor act prudently and in the client’s best interest at all times. Advisors will then rely upon one of the exemptions provided within the fiduciary rule (likely, the best interest contract exemption (BICE) or the level fee exemption).

In order to act prudently under the rule, the advisor would need to evaluate the existing IRA and compare it to the IRA that could be offered by his or her own firm (including an evaluation of applicable fees and expenses and the individual circumstances and goals of the client).

BICE requires that the firm have policies and procedures in place in order to complete this evaluation, which should also take into account the value of services that can be provided by the firm, investments offered by the plan and expenses associated with both plans.  The advisor must be careful to make no misleading statements, and must also ensure that he or she receives no more than reasonable compensation. When the rollover will be a 401(k)-to-IRA rollover, it is also important to note whether the employer sponsoring the 401(k) pays a portion of the expenses associated with the account.

Importantly, the advisor should be careful to document the rationale behind his or her rollover recommendation—i.e., by creating a written file that contains information regarding why the rollover is in the client’s best interest, and the steps that the advisor took to reach this conclusion.

Conclusion

Complying with the DOL fiduciary rule can be far from simple—but by knowing the rule and its exemptions, advisors are far less likely to run afoul of its requirements when making rollover recommendations.

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Read previous coverage of the DOL fiduciary rule in Advisor’s Journal.

For in-depth analysis of the rules governing IRA rollovers, see Advisor’s Main Library.

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