The new definition of fiduciary means more registered representatives held to a fiduciary standard of care who were previously prohibited from operating in a fiduciary role by their broker-dealer. As such, BDs will have to make one of the following decisions:
- Prohibit all reps from offering any fiduciary services. Of course, this means the BD must abandon all gross dealer concessions tied to their retirement plan business and risk losing reps with significant retirement business to competing BDs that will support a fiduciary business model. If the GDC is significant, how likely is this scenario?
- Force existing reps to work with a smaller group of pre-approved in-house or external fiduciary specialists. In this scenario the BD improves its chances of keeping the reps and all of the GDC revenue if in-house specialists are used, and assuming the reps are willing to share their retirement revenue with the specialist.
- Permit their reps to operate as a fiduciary. This will require the adoption of a risk mitigation strategy that involves the acquisition of fiduciary Errors & Omissions coverage and advisor ERISA fiduciary training from a reliable source that is plugged into the legal issues to keep the training materials current.
With the implementation of the final rule, the money earned on retirement plan business will drive the decision. There will be many BDs that will establish RIAs, if they don’t have one, beef up their E and O insurance, implement ERISA fiduciary training such as fiduciary education training, and adopt new client service agreements that will permit a rep to offer pure, fee for service engagements.
This last point is critical to mitigating fiduciary risk and brought to my attention recently by Thomas E. Clark Jr., of Counsel at The Wagner Law Group. Historically, takeover business is assumed via a broker-of-record (BOR) change without a rep necessarily taking on any fiduciary role or liability.
Under the new rules, the rep, upon receipt of a signed BOR, becomes a fiduciary on the plan. This carries with it a significant booby trap for the inexperienced and uninformed rep. In short, accepting a fiduciary engagement includes a co-fiduciary obligation under ERISA 405 to take corrective action for any breach you discover or should have discovered. Otherwise you may become liable for the breach and the accumulation of damages from the date you acquired, or should have acquired, knowledge of the breach.
To avoid this liability, fiduciary training is imperative to prepare a rep to identify the booby traps and avoid the uncomfortable position of threatening to end their engagement with a new client or issue some other ERISA ultimatum. A rep that fails to secure the proper fiduciary training is not only a target-rich environment for the experienced fiduciary advisor, he is also a danger to his client, his BD, and himself.
Granted, the army of reps that have sold thousands of retirement plans as a non-fiduciary have provided a meaningful service to society, but the non-fiduciary model for reps under the new definition of fiduciary is dead. In the future reps will have to adopt a technical approach and develop excellent analytical skills to diagnose fiduciary problems as well as prescribe appropriate solutions in order to properly serve their clients as well as protect themselves and their BD.
As Clark has said in numerous presentations, “Give me a day with all the documents and I’ll find something wrong with the plan.”
Of course, a rep turned fiduciary advisor with a focused role is not expected to analyze a plan as comprehensively as an ERISA attorney, however, it does emphasize the importance of a rep developing the fiduciary expertise that a plan sponsor needs.
As a risk mitigation strategy, a rep that lacks this expertise should refer an expert to be engaged by the plan sponsor as a non-fiduciary consultant either before or upon the rep being engaged. The expert’s role is to conduct a fiduciary diagnostic to determine if there are any breaches and what steps should be taken to correct any breach identified. If the plan sponsor refuses to take corrective action, the rep should resign from the engagement to protect himself and his B-D from the liability associated with each breach.
Bottom line, the BOR letter process of the past will change forever if the new definition of fiduciary is finalized. In the past, BORs were collected with no fiduciary implications but that is the past. In the future, BORs would imply a fiduciary model. As such, it will carry legal liabilities for the rep turned fiduciary advisor to know if there is an outstanding fiduciary breach that is under his/her purview. In addition, it will require the advisor to demonstrate their duty of loyalty and prudence by taking appropriate action to see to it that the breach is corrected.
David J. Witz is the CEO/Managing Director and Founder of FRA Plan Tools. With more than 35 years of experience as a fiduciary consultant and expert witness in pension and retirement plan litigation, Witz is a nationally recognized authority on the topic of fiduciary risk management.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
As usual Marcia Wagner is a great source of 401k timely information.
In fact she wrote White Paper on Sections 3(21) and #(38)and on topic of Investment Advise Fiduciary.
Thank you Marcia for posting this article on LinkedIn,
ERISA, Employee Benefits and Executive Compensation Law
https://www.linkedin.com/in/derekdariusmichalskijdllm