WILL I HAVE TO BECOME A FIDUCIARY? 

By Sam Deleo
Tucker Advisors Senior Content Specialist/Editor

If you’re a financial advisor, you have likely heard about the Department of Labor’s recent fiduciary rules. The larger question for the industry as a whole remains, where will these rules take us next?

The word “fiduciary” refers to any advisors who must legally prioritize their clients’ interests above of their own. When advisors are not fiduciaries, they follow what is called the “suitability” requirement, which is basically an ethical call to follow the same prioritization of interests.

According to the Department of Labor’s (DOL) website, the identification of a fiduciary follows ERISA standards and the five-part DOL test, based on the assumption that anyone who offers investment advice for a fee, commission or other compensation, will be regarded as a fiduciary.

Download Your Free
Referral Marketing Guide

Five-Part Test for Status as an Investment Advice Fiduciary

For advice to constitute:

“investment advice of a fiduciary, a financial institution or investment professional who is not a fiduciary under another provision of the statute must:

1. 1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
   2. On a regular basis,
   3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
   4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
   5. The advice will be individualized based on the particular needs of the plan or IRA.”

The DOL text goes on to say that a “financial institution or investment professional that meets this five-part test, and receives a fee or other compensation, direct or indirect, is an investment advice fiduciary under ERISA (Title I) and under the Code.” Additionally, “Title I of ERISA and the Code each contain provisions forbidding fiduciaries from engaging in certain specified ‘prohibited transactions’ involving plans and IRAs, including conflict of interest transactions, unless an exemption applies.”

While this update has not enforced any further regulation on the financial industry, many believe that day is coming. We recently interviewed Lloyd Domingos, Senior Director of Operations for Tucker Asset Management, about the current regulatory landscape and what he sees unfolding as we move forward.

1. Could you give a brief summary of what the current regulations mean for advisors?

Lloyd Domingos – Basically, the current rule, in a nutshell, would force insurance-only agents to act as fiduciaries—not get paid as a fiduciary, but to have the obligation to act as one. So basically, they’re going to turn you into a fiduciary whether you like it or not. But, if you don’t get your Series 65, you’re not going to get paid as a fiduciary. And you could potentially write less business, because clients will perceive that you’re not a holistic advisor, that you don’t perform the complete duties of an advisor in an all-encompassing way for your clients. Now, they haven’t begun enforcing the new definition of “fiduciary” as part of the rule. But that is supposed to begin on Dec. 20, 2021.

2. What does the IRA rollover exemption mean for advisors?

Domingos – This doesn’t mean that you can no longer roll over an IRA. But, if doing so would earn you money, you will likely need additional disclosures, documentation, policies and procedures, and annual review requirements. Again, this action cannot just help your pocketbook, it has to be in the best interest of the client.

3. How do you interpret the DOL’s “best interest” standard?

Domingos – It has to be the very best interest of the client. It can’t just be the “suitability requirement” anymore. It can’t be an action that is very good for the client, but not “the” best. Who is going to determine what this best interest is? The SEC? The client? The DOL? We don’t know that yet.

4. What are the key points advisors need to beware of in order to be in compliance with the present definition/regulation regarding IRA rollovers?

Domingos – I thought RIA in a Box provided a good summary of these points:
The new prohibited transaction exemption, which was affirmed by the Biden Administration on Feb. 16, 2021, “provides RIA firms with two options as relates to IRA rollovers:

1. Provide only general investment education regarding rollovers. Here, the RIA firm would not need to avail itself of the new prohibited transaction exemption; or
2. Provide investment advice regarding rollovers that affects compensation. Here, the RIA firm would need to utilize the new prohibited transaction exemption, with requirements including advice subject to the ‘Impartial Conduct Standards’ and a series of other disclosure, documentation, policies and procedures, and annual review requirements.”

5. There has been a lot of talk in recent years of potential new regulations for advisors, which some say could happen by December 2021. Could you comment on some of those possible changes?

Domingos –  I don’t want to speculate too much here. But the path the industry has been on over the last five to 10 years has definitely been one of more regulations, more processes and more standards to follow, not less. So, if anything, my opinion is that it will get harder to do business and not easier.

6. What do you see as the key areas of concern for advisors moving forward?

Domingos – Familiarize yourself better with the definition of “fiduciary” so you know it backwards and forwards, because it’s your livelihood. And take steps, whatever you deem necessary for your practice, to ready yourself for what might be further regulation, or at least more explicit regulation.

7. Why do you think the regulatory environment has changed and may continue to evolve?

Domingos – While many investment advisors and insurance agents truly have the best interests of their clients at heart, unfortunately, there have been the Bernie Madoffs of the world that have heightened the regulatory environment. That story, because of its sensationalism in the media, became somehow representative, when in fact, it really isn’t at all. But that’s just kind of the nature of how many of us react to big media stories like this, so people also likely expressed concerns to government agencies that they might not have expressed before, as well.

8. Are there steps that advisors can take now that will safeguard them from the potential new regulations?

Domingos – I don’t want advisors to think that if they get a Series 65 that it will cure all ills, but having a Series 65 means that you are already held to be a fiduciary in the eyes of the SEC. And most of these regulatory standards are part and parcel of what you already do, because you’re already held to that standard. Most Series 65 advisors’ compensation is fee based. That appeals to consumers, and rightfully so. If the consumers’ balances grow, so does the compensation for the advisor, because their fees are proportionally based on the client balances. But if the balances decrease, so does the balance for the advisor. So, everyone is in step. Neither party benefits while the other doesn’t. There’s a direct correlation.

9. What are the consequences of an advisor simply doing nothing now and waiting to see what happens?

Domingos – Worst-case scenario, you could find yourself going out of business. This could be the precursor to even more extensive regulation. Again, that’s why the Series 65 is important.

10. What assistance is out there for advisors who want to be prepared moving forward?

Domingos – There are educational materials and courses out there that advisors can find by searching online pretty easily. As an example, for advisors who qualify, Tucker Asset Management regularly hosts Series 65 Training Courses that advisors can take. We provide the classes and we pay for many of the costs associated with obtaining the Series 65 license. There is help out there for advisors.

We acknowledge that this is far from a comprehensive summary of the current regulations in our industry, and encourage you to research these issues on your own. It will be time well spent for your business.

We plan to closely follow this fiduciary definition and the regulations that may affect it later this year. Ignoring these issues as a financial advisor is no longer an option. The consequences can dramatically affect both the ways we do business and the potential success of those efforts.

Notes

For more information or assistance about fiduciary regulations, email Kori.Brooks@TuckerAM.com.

Sources:
1. The U.S. Department of Labor
2. RIAinaBox.com
3. ThinkAdvisor.com
4. MSN.com

– For Financial Professional Use Only. Insurance-only agents are not licensed to offer investment advice.