This is 51st 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.
The new fiduciary regulation includes, among its definitions of fiduciary advice, a recommendation to an IRA owner to transfer the IRA from another firm. As a result, the recommendation, if accepted by the IRA owner, will automatically result in a prohibited transaction. That is because, if the recommendation is accepted and the IRA is transferred, the adviser will obviously make more money than if it were not. That is a financial conflict of interest that is a prohibited transaction under the Internal Revenue Code.
Fortunately, there is an exemption, or exception, called the Best Interest Contract Exemption (BICE). However, BICE comes with conditions . . . the adviser and his or her supervisory entity (typically a broker-dealer or RIA firm) must comply with the Impartial Conduct Standards. There are three Impartial Conduct Standards:
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The adviser (and the supervisory entity) must adhere to the best interest standard of care (which includes the duties of prudence and loyalty).
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Neither the adviser nor the supervisory entity can receive more than reasonable compensation.
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The adviser and the supervisory entity must not make any materially misleading statements.
This article looks at the requirement to engage in a best interest process.
The first step of a best interest, or prudent process, is to determine the information that is “relevant” to making a decision that is “informed.” In other words, what would a person who is knowledgeable about such matters, and who is unbiased and loyal to the IRA owner, want to review in order to develop a recommendation? Unfortunately, there aren’t any specific guidelines in the fiduciary regulation or BICE. However, it seems reasonable to conclude that, at the least, the following would be required in most cases:
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The investments, services and expenses in the current IRA.
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The investments, services and expenses available in the IRA that the adviser will recommend.
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The needs, objectives, risk tolerance and financial circumstances of the IRA owner.
In the typical case, that may be enough. However, in some cases, there may be special circumstances that would require considerations of additional factors.
Once those considerations have been identified, the next step is to gather the information; that documentation should be retained in retrievable fashion in the event of SEC or FINRA examinations, IRS audits, or private claims.
The next step is to analyze the information. For example, if the investments and the expenses are similar for both the current IRA and a new IRA, the key is to consider the services in light of the needs and circumstances of the IRA owner. With that in mind, in this new fiduciary world, advisers and their supervisory entities should focus on the services that they will provide to retirement money, such as Individual Retirement Accounts. Generally speaking, the investment of retirement money (at least, based on guidance from the Department of Labor) involves considerations of generally accepted investment theories—such as modern portfolio theory, and of prevailing investment industry standards. Ordinarily, that would include strategies such as asset allocation, diversification among and within asset classes, portfolio construction, and so on. Those are “services” that are consistent with the best interest standard of care and that could justify a prudent, or best interest, recommendation to transfer an IRA.
The considerations listed in this article are not exclusive. There are many other factors that could reasonably be considered in developing a recommendation to transfer an IRA. The key, though, is that the appropriate documentation be gathered, a thoughtful analysis be made, and the recommendation be prudent and loyal.
The best interest fiduciary process is a new way of looking at everyday transactions and making recommendations about those transactions. It’s important for advisers to realize that it’s not just a compliance issue; instead, it’s a process . . . a thoughtful, documented, best interest process.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
Part 1- Interesting Angles on DOL’s Fiduciary Rule #1
Part 2 - Best Interest Standard of Care: Interesting Angles on the DOL’s Fiduciary Rule #2
Part 3 - Hidden Preamble Observations: Interesting Angles on the DOL’s Fiduciary Rule #3
Part 4 - TV Stock Tips and Fiduciary Advice: Interesting Angles on DOL’s Fiduciary #4
Part 5 - Level Fee Fiduciary Exemption: Interesting Angles on DOL’s Fiduciary Rule #5
Part 6 - Fiduciary Regulation And The Exemptions: Interesting Angles on the DOL’s Fiduciary Rule #6
Part 7 - Fiduciary Regulations And The Exemptions : Interesting Angles on the DOL’s Fiduciary Rule #7
Part 8 - Designated Investment Alternatives: Interesting Angles on the DOL’s Fiduciary Rule #8
Part 9 - Best Interest Standard and the Prudent Man Rule: Interesting Angles on the DOL’s Fiduciary Rule #9
Part 10 - FINRA Regulatory Notice: Interesting Angles on the DOL’s Fiduciary Rule #10
Part 11-ERISA and the Internal Revenue Code: Interesting Angles on the DOL’s Fiduciary Rule #11
Part 12- Potential Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #12
Part 13-Investment Policies: Interesting Angles on the DOL’s Fiduciary Rule #13
Part 14- Investment Suggestions: Interesting Angles on the DOL’s Fiduciary Rule #14
Part 15- Best Interest Contract Exemption: Interesting Angles on the DOL’s Fiduciary Rule #15
Part 16 - Adviser Recommendations: Interesting Angles on DOL’s Fiduciary Rule #16
Part 17 - Level Fee Fiduciary: Interesting Angles on DOL’s Fiduciary Rule #17
Part 19- Interesting Angles on the DOL’s Fiduciary Rule #19: Advisors' Use of "Hire Me" Practices.
Part 20- Three Parts of "Best Interest Standard of Care": Interesting Angles on the DOL’s Fiduciary Rule #20
Part 22-Banks and Prohibited Transactions: Interesting Angles on the DOL’s Fiduciary Rule #22
Part 24 - Differential Compensation Based on Neutral Factors: Interesting Angles on DOL’s Fiduciary Rule #24
Part 25-Reasonable Compensation Versus Neutral Factors: Interesting Angles on the DOL’s Fiduciary Rule #25
Part 27 - Definition of Compensation: Interesting Angles on DOL’s Fiduciary Rule #27
Part 28 - What About Rollovers that Aren’t Recommended?: Interesting Angles on the DOL’s Fiduciary Rule #28
Part 29- Capturing Rollovers: What Information is Needed?: Interesting Angles on the DOL’s Fiduciary Rule #29
Part 31 - “Un-levelizing” Level Fee Fiduciaries: Interesting Angles on the DOL’s Fiduciary Rule #31
Part 33- Discretionary Management, Rollovers and BICE: Interesting Angles on the DOL’s Fiduciary Rule #33
Part 34- Seminar Can Be Fiduciary Act: Interesting Angles on DOL’s Fiduciary Rule #34
Part 35- Presidential Memorandum on Fiduciary Rule: Interesting Angles on the DOL’s Fiduciary Rule #35
Part 36 -Retirement Advice and the SEC: Interesting Angles on the DOL’s Fiduciary Rule #36
Part 37 - SEC Retirement-Targeted Examinations: Interesting Angles on the DOL’s Fiduciary Rule #37
Part 42 - Rollovers under DOL’s Final Rule: Interesting Angles on DOL’s Fiduciary Rule #42
Part 43 - BICE Transition: More Than the Eye Can See - Interesting Angles on DOL’s Fiduciary Rule #43
Part 44 - Basic Structure of Fiduciary Package (June 9): Interesting Angles on DOL’s Fiduciary Rule #44
Part 47- “Real” Requirements of Fiduciary Rule: Interesting Angles on DOL’s Fiduciary Rule #47
Part 49- The Requirement to Disclose Fiduciary Status: Interesting Angles on the DOL’s Fiduciary Rule #49
Part 50- Fourth Impartial Conduct Standard: Interesting Angles on DOL’s Fiduciary Rule #50
Part 54 - The DOL’s RFI and Possible changes to BICE: Interesting Angles on the DOL’s Fiduciary Rule #54
Part 55- DOL’s RFI and Recommendation of Annuities- Interesting Angles on DOL’s Fiduciary Rule #55
Part 58- Recommendations to Contribute to a Plan or IRA- Interesting Angles on the DOL’s Fiduciary Rule #58
Part 60- What the Tibble Decision Means to Advisers: Interesting Angles on the DOL’s Fiduciary Rule #60
Part 61- The Fiduciary Rule, Distributions and Rollovers: Interesting Angles on the DOL’s Fiduciary Rule #61
Part 65- Unexpected Consequences of Fiduciary Rule - Interesting Angles on the DOL’s Fiduciary Rule #65
Part 66- Concerns About 408(b)(2) Disclosures: Interesting Angles on the DOL’s Fiduciary Rule #66
Part 67- From the DOL to the SEC - Interesting Angles on the DOL’s Fiduciary Rule #67
Part 68-Recommendations of Distributions - Interesting Angles on the DOL’s Fiduciary Rule #68
Part 69- Compensation Risks for Broker-Dealers and RIAs: Interesting Angles on the DOL’s Fiduciary Rule #69
Part 70-The Fiduciary Rule and Recordkeeper Services: Interesting Angles on the DOL’s Fiduciary Rule #70
Part 71- Recordkeepers and Financial Wellness Programs: Interesting Angles on the DOL’s Fiduciary Rule #71
Part 72-The "Wholesaler" Exception: Interesting Angles on the DOL’s Fiduciary Rule #72
Part 74 -One More Fiduciary Issue for Recordkeepers: Interesting Angles on the DOL’s Fiduciary Rule #74
Part 75 - The Fiduciary Rule: Mistaken Beliefs-Interesting Angles on the DOL’s Fiduciary Rule #75
Part 77 - The Fiduciary Rule: Mistaken Beliefs (#2): Interesting Angles on the DOL’s Fiduciary Rule #77
Part 78 - The Fiduciary Rule: Mistaken Beliefs (#3): Interesting Angles on the DOL’s Fiduciary Rule #78
Part 79 - The Fiduciary Rule: Mistaken Beliefs (#4)- Interesting Angles on the DOL’s Fiduciary Rule #79
Part 80 - Enforceable During Transition?: Interesting Angles on the DOL’s Fiduciary Rule #80
Part 83 - Part 2 of Undisclosed (and Disclosed) 12b-1 Fees: Interesting Angles on the DOL’s Fiduciary Rule #83
Part 85 -The Fiduciary Rule: What’s Next (Part 1)? : Interesting Angles on the DOL’s Fiduciary Rule #85
Part 86- The Fiduciary Rule: What’s Next (Part 2)?: Interesting Angles on the DOL’s Fiduciary Rule #86
Part 87 - The Fiduciary Rule: What’s Next (Part 3)?: Interesting Angles on the DOL’s Fiduciary Rule #87
Part 88 -The Fiduciary Rule: What’s Next (Part 4)? : Interesting Angles on the DOL’s Fiduciary Rule #88