Don’t Be an “Accidental” Fiduciary

With regulatory changes coming, advisers need to reconsider their fiduciary status.

The Securities and Exchange Commission (SEC) is preparing to issue a uniform fiduciary standard, and the Department of Labor’s (DOL) second attempt at redefining the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) is expected sometime this year. During a webinar hosted by Matrix Financial Solutions, Pamela S. O’Rourke, senior vice president and senior counsel at Integrated Retirement, said the DOL proposal will expand the scope of activity that would lead to fiduciary status for brokers and advisers.   

She explained that an adviser can either be a 3(38) investment manager who has discretionary control over plan assets and relieves the named fiduciary of liability for investment decisions, or a 3(21) investment adviser who shares fiduciary responsibility with the named fiduciary. The pending regulations focus on the ERISA 3(21) fiduciary definition.  

According to O’Rourke, the primary path to ERISA 3(21) fiduciary adviser status is to render investment advice for a fee. Other ways are to exercise discretionary authority or control over management of plan or its assets, or to have discretionary authority or responsibility over administration of the plan. Under current law, a 3(21) adviser is subject to ERISA fiduciary standards if the adviser provides investment advice on a regular basis, there is a mutual agreement between the adviser and the named plan fiduciary that the advice serves as the primary basis for investment selection, and the advice is individualized.   

O’Rourke said the DOL is looking to eliminate the requirements that advice would be provided on a regular basis and that advice would be the primary basis for investment selection. “Even if you don’t intend to be fiduciary, you may inadvertently become a fiduciary due to functions you perform,” she warned.

“You don’t want to accidentally become a fiduciary,” O’Rourke added. “You want to make a conscious decision so you can adequately protect yourself, know what regulations guide you and what compensation is acceptable.” She explained that if an adviser’s advice could change his or her compensation, that is a conflict of interest. That could limit an adviser’s ability to take 12b-1 fees and commissions. A fee for service model, in which a fee is received for services regardless of outcomes, is acceptable. Advisers can also take a level compensation, which allows for 12b-1 fees, but the amount of 12b-1 fees does not depend on the investments selected. Also acceptable is receiving compensation if the advice is based on an approved computer model.  

If an adviser determines he or she is a fiduciary or wants to be, the adviser may want to be bonded and carry fiduciary insurance, O’Rourke suggested. She said it is also a good idea for an adviser to periodically audit his or her business model to be sure the adviser is maintaining the fiduciary status desired and in compliance with appropriate regulations.  

There is much an adviser can do for a plan sponsor without being a fiduciary, O’Rourke noted. Advisers can provide investment education, assistance with vendor searches, plan reports and analytics, fiduciary education for plan sponsors, investment selection and monitoring and benchmarking of service provider fees. An adviser may want to outsource fiduciary functions to compete with advisers who are fiduciaries.  

“Define and communicate your value proposition relative to fiduciary support,” O’Rourke said. “You don’t have to be a fiduciary adviser to provide support for plan sponsors’ fiduciary duties.”  

Earlier this year, Matrix Financial Solutions released a guide to help plan advisers review their business models (see “Matrix Financial Releases ERISA Practice Guide”).