ERISA attorney Fred Reish looks at another “mistaken belief” about the fiduciary regulation.
In a recent blog post
on the fiduciary regulation, Reish explains that under that regulation, and the transition Best Interest Contract Exemption (BIC) — which has been in effect since June 9, 2017 — when an advisor gives conflicted advice to IRAs, plans or participants, the advisor must adhere to the Impartial Conduct Standards, which means that he or she must:
- Adhere to the best interest standard of care.
- Receive no more than reasonable compensation.
- Make no materially misleading statements.
Or, as Reish explains, in its essence, a combination of ERISA’s prudent man rule and duty of loyalty. He goes on to draw from language in the BIC, explaining that there is a substantial amount of guidance, through court cases and DOL opinions, about its meaning. “It means, first and foremost,” he writes, “that an advisor must engage in a prudent process to develop a recommendation,” a process that he notes must be done “carefully and skillfully at the level of a person who is knowledgeable about the particular issues (for example, asset allocation, selection of investments, insurance products, etc.).”
But then he cautions that although some people are saying that the best interest standard means that an advisor must recommend the best possible investment, “that is incorrect. In fact, the DOL has specifically stated that, even if it were possible to select the best possible investment, that is not the requirement,” he writes.
Rather, Reish explains, the requirement is that advisors act prudently when selecting investments… and prudence is defined by the quality of the process used by the advisor. “So, for example, where an advisor uses reputable software to evaluate the investments and to develop an appropriate asset allocation, the use of that software would be part of a prudent process and would document that the advisor was complying with the rules,” he explains.
That said, Reish notes that there is “certainly nothing wrong with an advisor doing more than is legally needed in an effort to prudently select investments.”
Reish has previously commented on another “mistaken belief” among advisors that fiduciary status could be avoided by presenting a list of investments to plan sponsors. The belief, he writes, was that, since the list did not “recommend” any particular investments, it could not be a fiduciary recommendation.