When Advisers Tout Their Own Services

Art by Tim BowerADVISER QUESTION: The Department of Labor [DOL] “fiduciary” definition delineates how to recommend an adviser who will be a fiduciary to a plan, a participant or an individual retirement account [IRA], without acting as a fiduciary himself. But what if I recommend myself and my investment strategies?

ANSWER: You can tout the value of your services and educate the prospective client without becoming a fiduciary adviser. However, when you recommend a specific investment, an investment strategy or a particular type of account that results in compensation to you or your firm, you will engage in a fiduciary act. And you may also be committing a prohibited transaction (PT) for which an exemption such as the best interest contract exemption (BICE) is needed.

Marketing one’s own services or providing general information about your investment strategies is not a fiduciary act under the DOL rule. However, discussions with prospective clients sometimes go beyond mere marketing and fall within the scope of investment advice subject to the fiduciary rule.

The following are examples of fiduciary acts that could result:

• Recommending an investment. During the meeting with a prospective client, the adviser discusses the merits of investing an IRA in the ABC mutual fund. That communication could be viewed as a suggestion that the prospective client invest in the ABC fund—in other words, it could be a fiduciary investment recommendation. If so, and if the prospect hires the adviser and agrees to the recommended investment, the advice is a fiduciary act. Because the adviser is using his fiduciary status to receive a fee—e.g., a 12b-1 fee—this is a PT for which the BICE is needed. To comply with the BICE during the fiduciary rule’s “transition period,” the adviser will need to satisfy three requirements, known as the impartial conduct standards (ICS). They are: 1) the recommendation must be in the best interest of the investor; 2) the adviser’s fee must not exceed a reasonable amount; and 3) the adviser must not make materially misleading statements. The transition period currently ends on December 31, but the DOL is proposing to extend it to June 30, 2019.

• Recommending an investment strategy. If an adviser has a number of different investment strategies, he may believe he needs to suggest one of them. And if the prospective client has a self-directed brokerage account (SDBA) in his employer’s 401(k) plan, the prospect likely wants to know which strategy would be most appropriate for that account. The adviser responds by pointing out that the 40% fixed-income/60% equity investment strategy would best suit the investor. This communication would be viewed as fiduciary investment advice. If the adviser is hired by the investor to consult on his SDBA, the adviser will have engaged in a fiduciary act and will be committing a PT. In order to receive this prohibited compensation, the adviser will need to comply with the ICS requirements of the BICE.

• Recommending an account. Assume that the prospective client has an existing IRA. The adviser suggests that the investor transfer that account to an IRA he advises because of the additional services he can provide—namely, investment strategies that support sustainable retirement income withdrawals for the investor’s lifetime. This recommendation is fiduciary investment advice. If the investor transfers his IRA to one with the adviser, the adviser will have engaged in a fiduciary act and be committing a PT. In order to receive the advisory fee for the IRA, the adviser will need to comply with the ICS requirements of the BICE.

On the other hand, in addition to marketing communications, there are discussions you can have with the prospective client that will not be considered fiduciary advice, such as:

• Encouraging plan participation. You can describe the benefits of increasing plan or IRA contributions and make an objective recommendation that the investor increase his contributions by a certain percentage each year.

• Providing education. You can describe to the investor general methods and strategies for managing assets in retirement, such as systematic withdrawal payments, annuitization and guaranteed minimum withdrawal benefits.

Communications with a prospective client can lead to unintended consequences under the DOL fiduciary rule. Advisers will need to examine and modify, where appropriate, presentations to prospective clients in order to address these issues.

Fred Reish is chair of the financial services ERISA practice at the law firm Drinker, Biddle & Reath LLP. A nationally recognized expert in employee benefits law, Reish has written four books and many articles on the Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS) and Department of Labor (DOL) audits, as well as pension plan disputes. Joan Neri, who has been associated with the firm since 1988, is counsel on the employee benefits and executive compensation practice group. Her practice focuses on all aspects of employee benefits counseling.