Some registered investment advisors (RIAs) are deciding not to provide investors with “rollover” retirement advice because of the complexity and expense of building technology that would satisfy the Department of Labor fiduciary rule requirements, attorneys said Wednesday.

The new rule, which goes into effect December 21, requires that advisors who recommend that an investor roll over their IRA or qualified plan into another vehicle much justify and explain the benefits, expenses and all conflicts of interest associated with the rollover, as well as benchmarking advisor compensation.

Some advisors are underestimating the complexities of the new regulatory rule, while others are opting not to commit the resources to building the systems needed to become compliant as fiduciary advisors, attorneys said during Faegre Drinker’s webinar “The DOL’s New Fiduciary “Rule” and the PTE: What Registered Investment Advisers Need to Know.”

“I do a lot of work with smaller RIA firms. They don’t have significant internal structures to build some of these necessary systems to comply with the DOL rule. So, they’re going in the direction of ‘let’s avoid making that rollover recommendation,’” Faegre Drinker partner Jeffrey Blumberg said.

Documenting the fact that you aren’t making rollover recommendations is equally as important, Blumberg said. “A significant point here is that you can’t just disclaim that recommendation and be done. You need to put some documentation around it to protect yourself and make it clear to you, your client and any regulator who sticks its nose in the door that you did not make a recommendation.”

Some RIAs are operating under the misguided notion that if they meet Securities and Exchange Commission fiduciary standards, they’ll be compliant under the Dol rule, but that’s wholly untrue, Blumberg said.

“Under the SEC if you give client full and fair disclosure of all the material facts and get their client consent, that fiduciary duty is met. In the SEC world, if I say to my client ‘I’m going to use my affiliated broker-dealer to trade your account,’ and client says ok, there is not breach of fiduciary duty. On the DOL ERISA side, absent meeting a prohibited transaction exemption (PTE), there is no disclosure that cures breach of fiduciary duty.”

For RIAs that do intend to do rollovers, the advisor must make a full explanation and document all the assumptions he or she uses to justify the rollover recommendation. “If you go the rollover recommendation route, you’ll have to develop sources of data, such as reliable benchmarks for typical fees. And then you’re going to have to define your process, like how are you going to evaluate the data, how are you going to weigh things. It has to be defined.”

Alternatively, RIAs will have to pull back and rethink if think if they want to make recommendations,” Reish said.

The process is more complex than some RIAs believe, even though the deadline enforcement of the DOL fiduciary rule is just six months away. “I’ve had advisors ask me, ‘can’t you just give me a one-page checklist and I’ll check the boxes and then make the recommendation.’ Well no, that’s not what this is asking for. This is asking for all data specific to that participant with a recommendation specific to that participant,” Reish said.

Understanding why when an RIA makes a rollover recommendation, it is considered a conflict of interest under the DOL rule is critical to deciding which route to take, he added. “When you make a nondiscretionary recommendation to roll over into an IRA or another plan, under the new set of rules that is almost certainly a nondiscretionary fiduciary recommendation. If it results in you getting money, then it is also a ‘prohibited transaction.’ I agree that this is a heavy lift. There is a tremendous amount of work to be done between now and Dec 21, to build out the systems needed to meet the conditions of the rule, so if you’re not working on it already and you’re a person of some influence at your firm, get them working on it. A lot of clients are already well under way and they’re still feeling pressure,” Reish said.

Just saying you are offering more investment options will probably not be enough to justify a rollover, Blumberg added.  In addition, moving a client from an employer-sponsored plan, where the employer covers much of the plan expenses, into an IRA where there is no such expense coverage, will have to be explained in disclosure as well. “You’ll have to compare the additional expense load with the potential for expansive or arguably better investments to be made in IRA.”

In the DOL world, advisors will also have to use benchmarking to explain their “reasonable compensation. You can’t just say we think 1% or 1.5% is fair. You have to go out and look at your competitors and figure out what is average and ask ‘do we fall into that. Are we in a reasonable range of our competitors?”

With the SEC if an advisor says in their Form ADV: “The services we provide may be available at a lower fee,” you’ve gotten informed consent from the client, Blumberg said. “If you’re at 2.5% and the industry is at 1% or 1.5%, you’re probably fine there with the SEC. With the DOL , you’re probably not ok, because that’s a significant difference.”

This article was provided by Bloomberg News.