3986 / What is the current DOL definition of "investment advice fiduciary"?
Editor's Note: Two separate district courts in Texas granted a stay of the effective date of the DOL's 2024 fiduciary standard and related amendments to PTE 84-24 and PTE 2020-02, which were set to become effective September 23, 2024. In Federation of Americans for Consumer Choice v. Department of Labor, the judge ruled in favor of a group of insurance and financial professionals, striking down a portion of PTE 2020-02. The judge agreed with a magistrate judge's recommendation and struck down the DOL's guidance that would have classified a single rollover as the beginning of an ongoing fiduciary relationship that would satisfy the "regular basis" element of the current five-part standard for determining investment advice fiduciary status. The judge found that the DOL had exceeded their authority and struck down those portions of PTE 2020-02 as "arbitrary and capricious". The DOL officially removed the 2024 rule from the CFR in March of 2026.
The longstanding 1975 five-part test continues to apply until the Trump-era DOL publishes a new standard. The materials below discuss the existing rules as well as the DOL amendments.
Under the 2024 rule, a financial services professional is classified as an investment advice fiduciary if (1) the provider offers investment advice or makes investment recommendations to a retirement investor, (2) the advice or recommendation is made for a fee or other compensation and (3) the financial services provider either specifically states that they are acting as an investment advice fiduciary or makes the recommendation within a professional relationship in which an investor would reasonably expect to receive sound investment recommendations that are in their best interest.
The professional relationship prong may be based on the fact that the provider (1) makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor's best interest, or (2) states that they are acting as a fiduciary when making investment recommendations. The final rule removed the prong that would have based the relationship prong on whether the advisor has discretion over investment decisions for the retirement investor (according to the DOL, that prong significantly overlapped with the remaining two elements).
The 2024 rule also clarifies that educational materials and similar communications do not fall within the investment advice fiduciary rule. The DOL specifically noted that informing an individual that they must take RMDs or face a penalty falls within the "educational" category and would not, on its own, subject the advisor to fiduciary liability.
The 2024 rule closes what the DOL calls the "one time advice loophole." That means one-time advice about things like rollover transactions and annuity sales can create fiduciary status if the elements of the investment advice fiduciary standard are otherwise satisfied. The new rule was scheduled to take effect September 23, 2024.
1975 Investment Advice Fiduciary Standard (the five-part test)
Prior to the 2024 rule's finalization, a person was classified as an investment advice fiduciary based on the so-called "five part test," which was created in 1975. Under that test, a person is an investment advice fiduciary to the extent they render investment advice for a fee or other compensation, whether direct or indirect, with respect to any money or other property of a plan, or have any authority or responsibility to do so.
For fiduciary investment advice standards to apply under the 1975 standard, a person who is not otherwise a fiduciary must (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 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. This is the five-part test that applied prior to the 2016 DOL fiduciary rule.
When the DOL adopted the five-part test, they offered insight into how it would interpret each of these five elements. With respect to the "regular basis" prong, the advisor's objective conduct was determinative. The DOL clarified that if the advisor is explicit in their communications that the advice is a "one-time" interaction, the advice was provided on a regular basis.
Similarly, the mutual agreement prong was evaluated based upon the entirety of the advisor's conduct. The advisor could not simply use boilerplate language disclaiming fiduciary status to avoid responsibility. The reasonable understanding of both parties was the relevant issue.
With respect to the "primary basis" prong, the advisor's advice was not required to be the "sole" basis for the investor's decision—it was sufficient that it was important to the investor, and could determine the outcome of the investor's decision.