The Department of Labor’s (DOL) proposal to broaden the scope of advisers and service providers subject to ERISA fiduciary standards carries broad implications for the financial services industry.
Under the DOL’s proposal, any person who provides investment advice or recommendations to a retirement plan or investor for a fee would become an ERISA fiduciary to that plan or investor. But while this rule is aimed at ensuring that advice providers always act in the best interests of their clients, absent modification, the proposed rule would have implications for fiduciary advice providers in the following ways:
Implications for Level-Fee RIAs
The proposed rule should have little effect on independent, level-fee registered investment advisers (RIAs) as long as they acknowledge their fiduciary status to the investors, don’t receive revenue sharing and do not recommend proprietary investments or products.
But exceptions to this rule would arise when an RIA recommends a plan rollover, and recommends themselves as the rollover advice provider, which are both newly classified as fiduciary advice under the proposal. This situation would ostensibly require RIAs to rely on an exemption under ERISA-prohibited transaction rules.
Implications for Non-Level-Fee RIAs and Brokers
For RIAs, brokers and financial advisers whose compensation is in any way variable based on the investments selected, the proposed rule offers the “Best Interest Contract” (or “BIC”) exemption as the sole means by which they can provide advice to investors. But under the BIC exemption, RIAs, brokers and advisers would be prohibited from providing fiduciary investment advice or recommendations to the sponsor of a 401(k) or other participant-directed plan.
A New “Best Interest Contract” Exemption
Fiduciary advice providers would need to apply a BIC exemption under the proposed rule to avoid a prohibited transaction violation under ERISA. This would oblige fiduciary advice providers to make available detailed, complex financial transaction and compensation disclosures, via point of sale and annual disclosures to the investor, as well as a continually updated website accessible to the public.
Review our summary decision chart for how the DOL’s proposed fiduciary rule could have a number of implications for fiduciary advice providers.
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