PLANADVISER - September/October 2017 - 70

ERISA vista
When Advisers Tout
Their Own Services
How the fiduciary rule affects self-promotion
ADVISER 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
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 prospecMarketing
one's
own
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
services ... is
not a fiduciary
act under the
DOL rule.
tive 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.
70 | planadviser.com september-october 2017 Art by Tim Bower
http://www.planadviser.com
PLANADVISER - September/October 2017

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