Referring To Other Advisors Could Be Risky Under DOL Rule

BOSTON – Do you make recommendations as part of your job as an investment advisor? Then watch out.

Under the proposed fiduciary rules from the Department of Labor (DOL), an advisor who recommends someone else to be an advisor could be considered a fiduciary, according to Washington attorney James F. Jorden. He is a shareholder of Carlton Fields Jorden Burt.

Jorden said the proposed rules will change the definition of fiduciary in substantial ways. The proposed definition is broader than the current definition, he said, citing the stipulations on recommendations as an example.

Assuming the rule does get adopted in a similar form to this year’s version, this could cause difficulties for advisors who are unaware.

Jorden spelled out some of the issues during a panel discussion here at LIMRA’s annual meeting. He and his co-panelists addressed other far-reaching changes in the proposed rule too, but the new definition has the potential for direct impact on financial advisors.

The takeaway for investment advisors is they will need to become familiar with the definition, so they don’t become fiduciaries unwittingly.

Four categories

The definition of fiduciary would establish four categories of financial advice, Jorden said.

“If you make a transaction recommendation, if you make a management recommendation, if you make an appraisal for a particular product, or if you make a recommendation for someone else to be an advisor, you could become, and likely will become, a fiduciary under ERISA and under the sale of products through IRAs.”

The rules say that advisors can apply to be fiduciaries in two ways, Jorden continued. One way is to acknowledge their fiduciary status.

The second way is more relevant to the current discussion about the breadth of the proposed rules. This says that an advisor can become a fiduciary by providing advice “by agreement (written or oral) that advice is individualized or specific to the individual for her consideration to invest.” That determination is based on what the individual thinks, not necessarily what someone else thinks, Jorden commented.

But what goes into making a recommendation? That too is “very broadly defined,” the attorney said. The proposed rules say a recommendation is any communication that can “reasonably be viewed as a suggestion…[to] engage in or refrain from taking a particular course of action.”

In view of that, “I suggest to you that pretty much any person discussing or disclosing an insurance plan under ERISA or through IRA is engaging in a recommendation.”

Co-panelist David C. Aspinwall, also an attorney, agreed on the breadth of the rule’s fiduciary definition. Under this regulation, investment discussions would create a fiduciary relationship when the discussions meet the definition of investment advice, said the chief operational risk officer and chief legal counsel at Great-West.

Because this is so broad, it would be “very easy” to get into the position of being considered a fiduciary, he said. “Just by referring someone to another advisor, a broker or an insurance agent constitutes a fiduciary act.”

One example is when an advisor or other person who, for compensation, refers a prospective or current IRA holder or 401(k) participant or beneficiary to an advisor. “This includes referrals to managed accounts,” Aspinwall said.

Another example is when the advisor or other person recommends, for compensation, that a prospective or current 401(k) participant or beneficiary roll over the plan assets into an IRA, he continued.

A third example is when such a person, again for compensation, recommends funds or annuity products to place into an IRA or 401(k), he said. This includes specific recommendations regarding asset allocation.

Lots of ways to trip

“There are a lot of ways to trip over and into that fiduciary status,” Aspinwall concluded.

This can raise some issues around compensation. For instance, he pointed out that the proposed rule has prohibitions on certain types of comp for financial advisors who are fiduciaries, unless a carve-out or exemption applies.

The prohibited types include revenue sharing, commissions and payments that would create an incentive to select one type of investment or asset over another.

However, he added, the DOL proposed rule does permit one type of compensation — registered investment advisors can receive a flat fee, as long as it is reasonable, he said. His assessment: “They are trying to push advisors to flat fees.”

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].