Reg BI Could Make It Easier for B/Ds to Compete With Retirement Plan Advisers

Experts say the new SEC rules could allow brokers to encroach into the traditional territory of advisers without having to meet the same fiduciary standard of care.

Generally speaking, the new Regulation Best Interest (Reg BI) rulemaking package that the Securities and Exchange Commission voted to approve last week does not introduce new fiduciary responsibilities for those advisers controlling retirement plan assets. This is because the Employee Retirement Income Security Act (ERISA) already holds retirement plan advisers to high fiduciary standards, Amy Oullette, director of retirement services at Betterment for Business, tells PLANADVISER.

“Regulation Best Interest does not fundamentally change the landscape for institutional retirement plan advisers because, for the most part, the new regulation explicitly carves out from the definition of retail investors ‘institutions and certain professional fiduciaries,’” agrees Ken Joseph, managing director and head of the disputes practice at Duff & Phelps. 

Because Reg BI emphasizes that broker/dealers and advisers have to make “suitable” recommendations that are in a client’s “best interest,” though perhaps an improvement over mere suitability, it falls short of creating new fiduciary responsibilities of the type ERISA prescribes, says William Francavilla, a retired senior vice president and director of corporate wealth management at Legg Mason who now writes on industry issues.

Retirement plan advisers “might not be happy that Reg BI allows brokers to encroach with advice into their territory [with respect to rollovers and distributions] without meeting a fiduciary standard of care,” warns Jamie Hopkins, director of retirement research at Carson.

Francavilla adds: “Reg BI should advantage the investor because the adviser will have to consider all assets that the investor owns to truly determine ‘best interest.’ Previously, it was incumbent upon the broker to only recommend investments that were ‘suitable’ for the investor. As such, I believe that B/Ds will be in a better position to compete with retirement plan advisers with respect to rollovers and distributions.”

As to how the Department of Labor (DOL) might react to Reg BI, Hopkins says, “Many do not expect an expanded DOL fiduciary rule in the manner that was attempted previously but, instead, perhaps a prohibited transaction class exemption that would allow brokers to provide advice across platforms while meeting the legal requirements of both the SEC and DOL without adhering to a fiduciary standard. So, this will be incredibly important for the fiduciary ERISA advisers to pay attention to as the year moves forward.”

Hopkins observes that with the SECURE Act potentially bringing more annuities into retirement plans, the industry could see “a surge of broker advice and products entering the retirement plan market over the next year.”

“Brokers can have a positive role to play in the retirement arena, as they often [recommend] lifetime income solutions like annuities,” Hopkins says. “The bigger issue is just making sure consumers actually know and understand the guidance being provided, as it likely won’t be fiduciary advice but a slightly lesser standard of care.”

Additionally, the SEC is now requiring all advisers and broker/dealers to provide their retail clients with a Customer Relationship Summary (Form CRS), adds Brendan McGarry, a partner at Kaufman Dolowich & Voluck. “Such information  may coincide with or, in some cases, duplicate the information provided in an adviser’s Form ADV,” McGarry says.

However, he says it will merely be additional paperwork for advisers. “Because plan advisers are already subject to a fiduciary standard under ERISA, this additional interpretation by the SEC of a fiduciary standard should not impact them when advising retirement plans.”