Advisors hoping to sidestep the forthcoming Department of Labor fiduciary rule will find it much more difficult, according to attorney Fred Reish of Faegre Drinker.
The rule has an expanded definition of when a registered representative, investment advisor or bank or insurance company profession will be considered a fiduciary for ERISA and Internal Revenue purposes, and for the first time includes one-time and annuities advice, but the real crux of the rule is a more expansive definition of “recommendation,” Reish said in a new blog.
The rule, which was proposed by DOL in November 2023 and went through a public comment period and two days of public hearings, has now been sent to the White House’s Office of Management and Budget, where approval is expect in mid-April, Reish and other attorneys said.
For advisors who want to sidestep the rule and pursue a non-fiduciary approach, they may offer “pure education, the provision of information and ‘hire me’ materials—which is, in effect, the ability to tout one’s services. The key, though, is that there not be a recommendation,” Reish said.
When a fiduciary recommendation is conflicted, it will be a prohibited transaction under ERISA and [IRS] Code, which would necessitate compliance with the conditions of a prohibited transaction exemption (PTE),” he added.
Conflicts include charging a commission or fee or offering discretionary advice. The exemptions to these conflicts require fiduciaries to give advice that meets a professional standard of care or duty of prudence, puts the retirement investor first and would prohibit advisors from charging more than reasonable compensation or misleading investors, the DOL said.
The DOL said that a recommendation is “communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the retirement investor engage in or refrain from taking a particular course of action,” the attorney said.
The takeaway is that “the more individually tailored the communication is to a specific retirement investor or investors, the more likely the communication will be viewed as a recommendation,” Reish said. However, the DOL said that the fact that a communication is made to a group rather than an individual would not be the sole deciding factor of whether a recommendation exists, he said.
“Generally speaking, I believe this means that, if an advisor is saying, explicitly or implicitly, that a particular investment or strategy is appropriate for a retirement investor, it could be viewed as a recommendation, thereby invoking the fiduciary standard and the prohibited transaction rules,” Reish said.
As an example, the DOL has said that the presentation of a portfolio of investments to a retirement investor, with a representation that it was individualized to the investor, would be viewed as a recommendation, even if the word “recommend” (or similar language) is not used in the presentation,” he said.
In the past, advisors who wanted to sidestep fiduciary status have presented clients with lists of investments, such as a list of six mutual funds, and have taken the position that this was not a recommendation, he said.
“While that was risky even then, it is clearly an issue now,” Reish said. Even the DOL has warned that “providing a selective list of securities to a particular retirement investor as appropriate for the investor would be a recommendation.”
Other approaches to avoiding fiduciary status may also be at risk, Reish warned. “The DOL is using what is called a step-transaction theory which, in effect, says that a series of steps or separate events or communications will be considered in the aggregate rather as being treat as being unrelated,” he said.