Broker-dealers need to consider using monitoring services if they are recommending riskier products to retirement plan investors under exemptions allowed by the U.S. Department of Labor, said Fred Reish, a leading compliance attorney at the law firm of Faegre Drinker.
Firms and their professionals who are offering what the rules terms “non-discretionary” fiduciary services could have more responsibility than anticipated when it comes to the need for monitoring complex or risky investments, Reish said in a new blog.
“So, from the DOL’s perspective, monitoring is not generally required. But, if a complex or risky investment is recommended to a retirement investor, and the retirement investor lacks the ability to monitor the investment without help, the advice fiduciary should clearly explain the need for monitoring to the investor when making the recommendation.’” Reish noted.
The DOL said "such monitoring could be performed by a third party, but the advice fiduciary should clearly explain the need for monitoring to the investor when making the recommendation.”
The new rules, “right or wrong, are designed to protect the financial security of retirement accounts, including IRAs. As a result, investment professionals and financial institutions should consider whether some investment recommendations could require monitoring and whether those recommendations should be made and, if so, how they will be monitored,” Reish warned.
The overall rule, which went into effect last February, allows a broad range of financial firms and their reps to receive conflicted compensation when they make non-fiduciary investment advice, including rollover recommendations to retirement plans, participants and IRA owners, provided they follow the new requirements.
Firms and advisors who have discretionary authority over their clients’ assets obviously have a monitoring obligation, Reish said.
But for those who instead want to offer “non-discretionary financial advice” to retirement investors, the DOL’s rules leave it up to the prudence of the firm or rep, he said.
The rule states that the DOL "expects that financial institutions and investment professionals will consider whether the investment can be prudently recommended without some mechanism or plan for ongoing monitoring.”
The agency did not provide examples of what, in their view, constitutes a risky or complex product.