Is It Possible To Be An Advisor Without Being A Fiduciary?

This is my 62nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Under the new fiduciary definition (that applied on June 9), an investment “suggestion” is fiduciary advice. That includes suggestions about a range of issues, including investments, insurance products, investment strategies, other investment advisors and managers, IRA transfers, and plan distributions.

Because of the breadth of the definition, it is almost impossible to be an advisor to a plan without becoming a fiduciary. Under the old rules advisors would provide investment information that, at least arguably, was not fiduciary investment advice. However, under the new definition, where an advisor provides information about investments, it’s possible, perhaps even probable, that the advisor would reasonably be viewed as having suggested that the plan sponsor, participant or IRA owner choose the investments. Otherwise, why provide information about those specific investments . . . unless it was a suggestion that the retirement investor select one or more of them?

Let’s delve into that a little more deeply . . . in the context of a 401(k) plan. It is possible that for a new plan or for a plan changing recordkeepers, the recordkeeper would provide a list of investments in response to an RFI or RFP. If properly done, the list will not be fiduciary advice—because of a fiduciary exception for recordkeepers. In turn, if the advisor does not comment on the list, either favorably or unfavorably, the advisor would not be viewed as having provided fiduciary advice.

Then, at future meetings with the plan sponsor, the advisor or the recordkeeper could simply provide information about the existing investments. However, is it feasible that an advisor would not make comments about poorly performing investments which could be viewed as “suggestions” that they be removed? If those suggestions are made by an advisor, it could be fiduciary advice. Similarly, if an investment is removed, a plan sponsor needs to select a replacement investment. Who will provide the potential replacement investments to the plan sponsor? If the advisor does, that could be a suggestion, or fiduciary advice, that one of those replacement investments be used.

Alternatively, some broker-dealers may decide that their advisors can only use recordkeepers that include fiduciary advisers on their platforms. Those platform advisers would then recommend or select a plan’s investment line-up (and, in the future, would remove and replace investments, as appropriate). That might work. However, the recommendation of a third party fiduciary investment adviser or manager is also a fiduciary act. So, while the advisor would not be a fiduciary for the recommendation of investments, the advisor could be a fiduciary for “suggesting” that the plan sponsor use a fiduciary on the recordkeeper platform.

Unfortunately, these issues have not been tested in the courts or in FINRA arbitrations . . . so, it’s almost impossible to tell where the line will be drawn. As a result, broker-dealers and RIAs need to decide whether they will take the position that they are not fiduciaries—and be subject to risk, or whether they will take a conservative position and clearly be compliant.

While these rules apply to both ERISA retirement plans and IRAs, the issue is particularly acute for plans. That is because a service provider to plans must state, in its 408(b)(2) disclosures, whether it is serving as an ERISA fiduciary. If it is not, then it can remain silent on the issue. However, if the firm and its advisors will be acting as ERISA fiduciaries, that must be affirmatively stated in the 408(b)(2) disclosures. (Note that, during the transition period, recent DOL guidance permits the firm to describe its fiduciary services in the 408(b)(2) disclosures, but does not require that the firm specifically state that it is an ERISA fiduciary . . . with one exception. If a firm has previously said in its 408(b)(2) disclosures, that it was not acting as a fiduciary, that must be corrected by affirmatively saying that it is now acting as a fiduciary.)

The new rules have a number of unforeseen applications. With the likely delay of the applicability dates of the exemptions, including of the full and final Best Interest Contract Exemption, this is a good time to think about how these rules apply and what changes need to be made.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.