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Dispelling a Mistaken Belief About the Fiduciary Regulation

By NTSA Net Staff • January 08, 2018 • 0 Comments
Headlines notwithstanding, the fiduciary regulation has been in effect since June of last year — but there are misunderstandings aplenty, and in his most recent blog post, Fred Reish takes one on.

Reish explains that there had been a common belief among advisors that fiduciary status could be avoided by presenting a list of investments to plan sponsors. The belief, he writes, was that, since the list did not “recommend” any particular investments, it could not be a fiduciary recommendation.

Regardless of the accuracy of that belief prior to June 9, Reish notes that it is not correct today. “The presentation of a selective list will result in fiduciary status, implicating the prudent man rule, the duty of loyalty, and the fiduciary prohibited transactions,” he notes. And, if there was any doubt, he cites the following from the Labor Department: “Providing a selective list of securities to a particular advice recipient as appropriate for that investor would be a recommendation as to the advisability of acquiring securities even if no recommendation is made with respect to any one security.”

Reish goes on to explain that while in his experience the practice of presenting selective lists was primarily for participant-directed (e.g., 401(k)) plans, under the new definition, the presentation of selective lists of investments would also be fiduciary advice to individual retirement accounts and individual retirement annuities.

The moral of this story, according to Reish, is that advisors and their supervisory entities (for example, broker-dealers and RIAs) need to realize that when they provide these types of lists, they will be making fiduciary recommendations.

Moreover, for recommendations to retirement plans, that means that the advisor must engage in a prudent process to evaluate the investments based on factors such as the expenses of the investments, the quality of investment management, the reasonableness of the compensation paid to the advisor from the investments (e.g., 12b-1 fees), and so on. “From a risk management perspective, that process should be documented and retained in a retrievable form,” he concludes.

As for recommendations to IRAs, if the advice is given by a “pure” level fee fiduciary, Reish says that the advisor is not committing a prohibited transaction (that is, doesn’t have a financial conflict of interest), and the best interest standard of care does not apply to the advisor. A “pure” level fee advisor would typically be an RIA that charges a level advisory fee, does not receive any payments from the investments, and does not recommend any proprietary products, he notes.

On the other hand, where an advisor to an IRA receives payments from the investments or where the advisor can affect the level of his or her compensation based on the investments that are recommended, Reish says that would be a financial conflict of interest — a prohibited transaction under the Internal Revenue Code.

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