Compliance January 19, 2011

New Definition of Fiduciary, a Litigation Nightmare?

In comments to the Department of Labor (DoL) regarding the proposed change to the definition of fiduciary, Liberty Capital Investment Corporation said the rule “would be a litigation nightmare.”
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In the letter, Kenneth Margraf, Vice President at Liberty Capital, said making brokers and registered investment advisers (RIAs) fiduciaries to retirement account clients “adds nothing positive to the protection of clients.” Margraf contends that the new definition would take away from investment choices brokers would have in making asset recommendations to meet stated client objectives, and would discourage them from making any aggressive recommendations, even if appropriate, for fear of litigation.  

Margraf argues that the terms “fiduciary” and “prudent man rule” are very broad and subject to interpretation based on different situations.  If the DoL is to hold the brokers and (registered investment advisers) RIAs to a fiduciary standard, additional clarification from FINRA (Financial Industry Regulatory Authority) would be necessary.

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The U.S. Chamber of Commerce also feels more clarification will be needed.  In its comments to the DoL, it asked for a 60-day extension of the comment period on the definition change  to consider results of a study required by the Securities and Exchange Commission by the Dodd-Frank Act.  

According to the Chamber’s letter, one day after the comment period ends for the DOL proposed rule, the SEC is required to complete a study on the standard of care under the securities laws for broker-dealers and investment advisers. The study is required pursuant to section 913 of the Dodd-Frank Act instructing the SEC to study the standard of care applicable to broker-dealers and to study the effects of extending the fiduciary standard of care applicable to investment advisers under the Investment Advisers Act of 1940 to broker-dealers.   

“We anticipate that this study will significantly overlap with issues contained in the DOL’s proposed rule,” the Chamber said.  

Comments received by the DoL’s Employee Benefits Security Administration can be viewed at http://www.dol.gov/ebsa/regs/cmt-1210-AB32.html.
In Practice January 19, 2011

Client Service Top Reason for Provider Switch

Retirement plan sponsors report that client service has now become one of their top reasons for choosing a new plan provider, according to a survey by Anova Consulting Group.
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In surveys from 2008 and 2009, client service ranked number three or four in importance, after fund selection and fees, according to a press release.  Now, it’s reason number one or two.   

Among the reasons for the increased importance of client service are the continued commoditization of funds and technology in the retirement plan marketplace, as well as growing fee pressure affecting providers. Another reason, according to Rich Schroder, president of Anova Consulting Group, is that “many recent plan turnovers have tended to be among plans that are more complex in nature and need a stronger client service team to handle them.”  

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The survey shows the value placed on client service rose as retirement plan sponsors reached the final stage of their buying process. While plan sponsors were only 12% more likely to refer to client service as a factor in their initial search criteria, 33% were more likely to cite it as a top reason for the final decision.   

“These results should be a wake-up call for retirement plan sales teams that are not currently bringing the appropriate service team members to finals presentations,” said Schroder, in the press release. “Plan sponsors want to know how their account will be managed once the sale is made, so for sales teams, it’s critical that relationship managers not only be in the room, but be skilled at presenting in finals situations.”  

The 2010 Anova survey included responses from more than 300 plan sponsors in middle and large markets (plans with over $25 million in assets under administration).

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