Referrals Under the Final Fiduciary Rule
In a recent PLANADVISER article, Fred Reish, chair of the Financial Services ERISA practice at the law firm Drinker, Biddle & Reath, answers the recently common adviser question in light of the final fiduciary rule:
“Is the recommendation of an investment adviser to an individual retirement account (IRA) owner a fiduciary act under the Department of Labor (DOL) final fiduciary rule?”
Key points from Reish’s answer:
Making a recommendation that results in a fee for the recommendation is a fiduciary act under the new rule. That means the referral fee could be a prohibited transaction.
“If the person making the recommendation—the referrer—receives a fee for the recommendation, it will be a fiduciary act when the rule becomes applicable, on April 10, 2017. That means the referral fee may be a prohibited transaction.”
The recommendation of both discretionary and non-discretionary fiduciary investment advisers to the IRA owner, plan or participant will be a fiduciary act.
“Once the rule applies, the recommendation of both discretionary and non-discretionary fiduciary investment advisers to the IRA owner, plan or participant will be a fiduciary act, and regardless of whether the recommendation is individualized and based on the investor’s needs or not.”
To avoid a prohibited transaction, a referrer could use the best interest contract (BIC). However, this often may be more expensive than it’s worth.
“As an alternative, a referrer could, in theory, use the best interest contract (BIC) exemption in order to avoid the prohibited transaction. However, that won’t work for practical reasons; it’s too cumbersome and expensive for the relatively small amounts involved.”
Recommending fiduciary advisers, for a fee, to ERISA plan fiduciaries and plan participants is also considered a fiduciary act.
“Similar challenges will apply regarding referral of fiduciary advisers, for a fee, to Employee Retirement Income Security Act (ERISA) plan fiduciaries and plan participants. Under the rule, those recommendations will be considered a fiduciary act, subjecting the referrer to the ERISA prudent man standard of care and the same prohibited transaction issues.”
There may be new referral arrangements created moving forward that are compliant with the rule.
“Hopefully new arrangements will be developed that are compliant with the rule and the prohibitions. For example, it may be possible for a referrer to tell an IRA owner that he, the referrer, will charge a set fee—e.g., 20 basis points (bps)—to help find a good-quality investment adviser and will arrange for the adviser to pay that fee. Properly done, that would work.”