How DOL’s New Fiduciary Rule Would Affect Rollover Advice

Advisors providing rollover advice may become subject to fiduciary standards, but they may find relief in the new prohibited transaction exemption.

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The Department of Labor (DOL) has finally released its follow-up to the 2016 fiduciary rule, which was vacated entirely in 2018.

Importantly, the proposal confirms that the five-part test for determining an investment advisor’s fiduciary status will continue as the law of the land. From that point, the DOL proposes a new class exemption to the prohibited transaction rules. Advisors who qualify as fiduciaries can continue to receive a wide range of compensation — including commissions — with respect to retirement-related investment advice so long as they comply with a set of impartial conduct standards.

Significantly, the DOL guidance clarifies that advisors who provide rollover advice to clients may become subject to the fiduciary standards — but may similarly find relief in the new prohibited transaction exemption (PTE).

The 5-Part Fiduciary Test: Application to Rollover Advice 

The DOL confirmed that investment advisors who receive any type of fee or commission and satisfy the criteria of the historically applicable five-part test are investment advice fiduciaries under both the Employee Retirement Income Security Act and the Internal Revenue Code.

Determining whether an advisor or financial firm is an investment advice fiduciary requires a detailed “facts and circumstances” analysis in every case. However, many advisors will be grouped into this category if the proposal becomes final.

Advisors will be classified as investment advice fiduciaries if they:

  1. render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property
  2. on a regular basis
  3. pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner/plan participant that
  4. the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
  5. the advice will be individualized based on the particular needs of the plan or IRA.

The DOL proposal is clear on the fact that rollover advice alone may be sufficient to generate investment advice fiduciary status (recommending a rollover from an ERISA plan to a non-ERISA IRA, for example). This represents a potential departure from prior guidance, where the DOL found that rollover recommendations alone might not subject an advisor to fiduciary status. Further, giving advice to the plan is deemed to be equal to giving advice to the plan participants under the proposal.

Rollover advice can be made as a part of an ongoing relationship between client and advisor, or an anticipated future ongoing relationship between the parties. Further, determining whether there is a “mutual understanding” between the parties is based upon the reasonable understanding of both parties — even if no formal agreement is found. The DOL was careful to note that written documents disclaiming liability will not necessarily be respected.

Unpacking the Impartial Conduct Standards

The proposed class exemption would be available to RIAs, broker-dealers, banks and insurance companies (financial institutions) and their individual employees, agents and representatives (investment professionals) that provide fiduciary investment advice to retirement investors.

Covered investment professionals will be allowed to receive compensation related to recommendations that might otherwise cause them to run afoul of the prohibited transaction rules.

The impartial conduct standards generally follow requirements that should be familiar to advisors who took steps to comply with the 2016 DOL fiduciary rule. They include standards related to:

  1. acting in the client’s best interests,
  2. receiving only reasonable compensation and
  3. refraining from misleading statements.

Importantly, the DOL clearly states that whether these elements are satisfied is based on a reasonable analysis of the facts.

The “best interest” standard is based on the traditional concepts of an advisor’s duties of prudence and loyalty. Although this standard does not specifically include a duty to monitor investment performance, a duty to monitor could arise depending upon the circumstances of a particular transaction.

Compensation must be reasonable in relation to what the client receives — and advisors are under no duty to recommend transactions that generate the lowest fees.

Financial firms and advisors will also be required to disclose their fiduciary status to clients in writing. Disclosures must be made in plain English and understandable to the investor given the investor’s level of skill and experience, but a specifically tailored disclosure is not necessarily required for every individual client (again, circumstances will be important). As with the 2016 rule, financial firms will be required to take steps designed to mitigate conflicts of interest.

Conclusion

The DOL proposal is generally positive in that it would allow advisors to receive a wide range of compensation for their services if the impartial conduct standards are satisfied. Further, it is designed to align with state-level initiatives, as well as the SEC’s Regulation Best Interest. Advisors should pay close attention as the rule progresses toward finalization throughout the year.

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