Question: I am a registered investment adviser who provides investment advisory and management services to individuals. I often have meetings with prospective clients about my services and investment strategies. If the Department of Labor’s proposed fiduciary rule is finalized, what issues will I need to consider when I conduct these meetings?

Answer: The DOL’s proposed fiduciary rule has an expansive reach, and many interactions with a prospective client that include a discussion of retirement accounts could be considered fiduciary advice. As such, you would need to satisfy a best interest standard of care and may need to comply with DOL Prohibited Transaction Exemption 2020-02 in order to avoid a prohibited transaction.

The proposal is comprised of two components discussed below: a three-part test and an expansive definition of covered advice.

The Proposed 3-Part Test

Fred Reish

Under the proposal, you would be considered a fiduciary adviser if you provide “covered advice” to the investor about the investor’s retirement plan account or individual retirement account and receive direct or indirect compensation under circumstances where the following three conditions are met:

• Part of Your Business: Providing recommendations to investors on a regular basis is a part of your business;
• Individualized advice: The circumstances indicate that the recommendation is based on the investor’s particular needs or individual circumstances; and
• Reasonable to rely on the advice: The circumstances indicate that the investor may reasonably rely on the recommendation as being in his or her best interest.

These three conditions would likely apply to most of your interactions with clients and prospective clients. As an investment adviser providing investment advisory or management services to individuals, recommendations are provided regularly as part of your business. In addition, your onboarding process likely includes obtaining information about the investor’s particular investment objectives and financial needs, as this supports your duty of loyalty and care under Securities and Exchange Commission rules. Finally, the circumstances of the meeting would cause the investor to reasonably rely on your recommendation as being in his or her best interest.

Covered Advice

Joan Neri

That said, if you provide “covered advice” to the investor about the investor’s retirement plan account or IRA under these circumstances, it would be fiduciary advice under the DOL’s proposal. Covered advice includes recommending investments for the investor’s IRA or retirement plan account, but it would also include any of the following:

1. Proposing an investment strategy

Showing investors a proposed asset allocation is a useful way to illustrate an investment strategy. Under the DOL proposal, if you provide the investor with a proposed asset allocation or investment strategy for an IRA or retirement plan account, it would be considered covered advice, even if you do not identify any particular investments.

2. Recommending an investment adviser or investment manager

The DOL currently takes the position that recommending a discretionary investment manager is the same as recommending an investment and, as such, is covered advice. Under the DOL proposal, covered advice would also include recommending a non-discretionary investment adviser.  

3. Recommending an investment account

Recommending an account type for an IRA or retirement plan would also be considered covered advice. This is consistent with the SEC’s Regulation Best Interest and the fiduciary obligations under the Investment Advisers Act. While the DOL does not define account type—other than to provide two examples (i.e., commission- and fee-based accounts)—the SEC rules are more detailed. The SEC lists a range of different account types—including education accounts (e.g., 529 plans), specialty accounts (e.g., cash or margin accounts), retirement accounts (e.g., IRAs, Roth IRAs, SEP-IRAs) and accounts with different levels of services. This suggests that a similar analysis could be applied to advisory accounts and that advisory accounts with different features and levels of services could be treated as different account types.

4. Recommending a plan or IRA distribution

Under the DOL’s proposal, recommending a rollover, transfer or distribution of assets from a plan or IRA—including the amount, form and destination of the assets—is considered covered advice. This would apply to plan-to-IRA rollovers, plan-to-plan rollovers, IRA-to-IRA transfers and IRA-to-plan rollovers. This is consistent with current DOL guidance. What is surprising is that covered advice would also include recommending a distribution from a plan or IRA to purchase an investment product outside the plan, such as recommending a distribution to purchase an insurance policy outside the plan.

5. Recommending how to invest rollover monies

Recommending how rollover monies should be invested—without recommending the rollover itself—is also covered advice under the DOL’s proposal. So, for instance, providing an IRA owner with an investment strategy proposal if a rollover is made into an IRA with the adviser would be considered covered advice—even if no rollover recommendation was made.

Implications and Next Steps

If your interactions with retirement investors would be considered fiduciary advice under the DOL proposal, then there are two main considerations. First, if the covered advice is with respect to ERISA plan assets, you would need to comply with the ERISA standards of prudence and loyalty. Second, if the advice to an ERISA plan or an IRA resulted in compensation (direct or indirect) to you or your firm that you would not have otherwise received, you would need to rely on PTE 2020-02 in order to avoid a prohibited transaction.

One of the conditions of PTE 2020-02 is to comply with a best interest standard—identical to the ERISA duties of prudence and loyalty. This means that fiduciary advice with respect to IRA assets would be subject to an ERISA-like standard of conduct under PTE 2020-02, even though IRA assets are not subject to ERISA. We will be discussing the specific requirements of PTE 2020-02, including the DOL’s proposed amendments, in our next article.

Although the DOL proposal is not yet final, we expect it will be finalized later this year, possibly in a form very similar to the publicized proposal. In the meantime, you should review your communications and disclosures to retirement investors and determine how to address interactions that could, under the proposal, be viewed as fiduciary advice.