Financial Advisor = Fiduciary?

[Santo Gold]

Is a financial advisor automatically a fiduciary for a plan? I looked up the definition of fiduciary and read that "...a person who renders investment advice for a fee or other compensation, direct or indirect, with respect to any assets of the plan, or has the authority to render such advice (even if not actually rendered), is a fiduciary".

In my specific situation, the financial advisor will receive commissions on the assets, but I take this to mean something different than receiving a fee or compensation. Also, all assets are self-directed.

Thanks for your help.

[four01kman]

You are living in a dreamworld. Check with you e&o carrier. How you receive the dollars is not material, receiving dollars for providing particular services is.

[E as in ERISA]

Posted on today's benefit buzz an article from Principal http://www.principal.com/allweb/docs/ris/m.../pq/pq_7194.pdf

[Santo Gold]

Thanks for the great link. Financial advisors can limit their services to avoid fiduciary responsibility, per page 3. Very informative.

[Kirk Maldonado]

The DOL regulation on this point is section 2510.3-21©(1).

[Guest Pensions in Paradise]

SantoGold - I'm playing devil's advocate here. If the financial advisor is not a fiduciary and is not providing investment advice to the plan and is not providing investment advice to the participants, then why is the financial advisor receiving commissions??? Shouldn't the financial advisor instead be paid a flat fee for whatever services (lol) he/she is providing.

I would be concerned that you have a breach of fiduciary duty if the plan is paying ongoing commissions to a financial advisor who is not necessarily providing meaningful services to the plan.

[Santo Gold]

The financial advisor is giving investment advice to the participants. I do not know how specific or tailored it is to each participants. The trustees have picked the investment choices available to the participants, based in part on the FA's advice. Commissions are paid; this is not a fee for service arrangement. The FA is saying that their is an indemnication agreement with the trustees that will hold harmless the FA for any investment performances, and that therefore he is not a trustee. Can this be true?

FYI, based on the link the EAIE provided, there are instances where FA's will not be considered fiduciaries. I need to research further to see if that applies here.

[Bird]

Commissions represent compensation for sales activity, not financial advice. I know the line gets blurred when the payments are trail-only (a percentage of assets rather than a percentage of sales) and a lot of reps are probably guilty of giving "advice" (I think it's a mistake on their part ot hold themselves out as "financial advisors"), but I think that the SEC is the agency that would be more concerned than the DOL.

If anyone knows of any actions by the DOL in which a broker was treated as a fiduciary because he gave "advice" even though he was paid a commission, please tell us about it.

I DO think HOW you receive compensation IS relevant. I would say it defines the relationship, unless other actions override it. Holding oneself out as a financial advisor when he or she is really a broker is probably foolish, but not necessarily enough to change the relationship. Educating participants about the investment options is definitely OK (that is, part of the broker's job), but making investment choices and making changes for the participants without their consent is almost certainly going too far.

[Bird]

Clarification, er, really a correction to what I posted recently-

it appears that "financial advisor" is an acceptable term in the brokerage industry for a broker. It's "investment advisor" that gets you in trouble (with the SEC if you're not properly registered as one, and with fiduciary status implications in the plan arena).

[Guest gdburns]

The terms do get abused. It has been reported that there are "brokers/financial advisors" who steer participants towards certain "chosen" investments.

I have seen presentations that use comparisons and projections to "guide" the decision. This usually crosses the line and could be regarded as being "Investment Advice".

[Guest rustymonty]

If a company wants to hire an independent CFP to come in and offer investment recommendations to plan participants and pay for these services directly out of company funds and not out of plan assets, does the fiduciary rule still apply? If so then every financial advisor, planner, stockbroker, recommending 401k allocations to their clients could also be guilty of being a fiduciary. They in theory would be compensated in some way to to work with their clients and part of that compensation could be viewed as from making investment recommendations for their 401(k). I have been asked by a company to provide investment allocations to participants for an annual fee. I am not the broker on the plan and did not select the plans investment offerings. I am simply trying to help participants allocate their 401(k) after assessing their individual risk tolerance?

[Don Levit]

The main question to look at when considering whether one is a fiduciary, is whether one has discretionary authority, control and responsibility.

Merely influencing decisions of trustees or participants does not give a financial advisor decision-making authority over plan assets.

In short, financial advisors, as well as other service providers, if simply performing their usual professional functions, are not considered to be fiduciaries.

Don Levit

[Guest gdburns]

A financial advisor who "influences" investment decisions runs the risk of being a fiduciary.

A financial advisor in the sense that it relates to the marketing of the investment options in a Pension plan or 401(k) etc is only supposed to explain the merits and technicalities of the particular investment products that he/she is representing. Projections and comparisons are done in a prescribed format and with content, as approved for use under NASD and SEC guidelines. These guidelines do not allow "influencing" or the making choices.

The problem is aggraved by the misuse of the designation. Sales Reps would be the more appropriate term since advice is not what is given but a sales pitch.

Anything beyond the dissemination of product information is beyond professional duties. Anything beyond the professional duties runs the risk of being fiduciary. In the context of providing investment options to plan participants, the only professional duty is the providing of product information.

You might want to read pages 3 and 4 of the above linked Prudential document although a full reading would be better especially the "Definitions".

[four01kman]

My understanding of part of what makes an investment advisor (however titled) a fiduciary is based on whether the individual "provides investment advice for a fee". Further, my understanding of the DOL position is that is not relevant whether the compensation is through fees, commissions or trails. Additionally, this advice can be rendered either to the employer sponsoring the plan, the plan participants or both. Although there doesn't seem to be a "bright line" test, it is hard for me to see a situation where the broker, financial advisor, etc. fails to be a fiduciary when providing investment advice to the employer or the participants.

[Guest gdburns]

The root of the problem lies in your phrase "when providing investment advice to the employer or the participants."

Once you advise rather than inform, the line is crossed.

[Kirk Maldonado]

Here is the text of the regulation:

A person shall be deemed to be rendering “investment advice” to an employee benefit plan, within the meaning of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, only if:

(i) Such person renders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property; and

(ii) Such person either directly or indirectly (e.g., through or together with any affiliate)

(A) Has discretionary authority or control whether or not pursuant to agreement, arrangement or understanding, with respect to purchasing or selling securities or other property for the plan; or

(B) Renders any advice described in paragraph ©(1)(i) of this section on a regular basis to the plan pursuant to a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan or a fiduciary with respect to the plan, that such services will serve as a primary basis for investment decisions with respect to plan assets, and that such person will render individualized investment advice to the plan based on the particular needs of the plan regarding such matters as, among other things, investment policies or strategy, overall portfolio composition, or diversification of plan investments. Regulation 2510.3-21©(1).

[Guest gdburns]

Santo Gold clarified that "The financial advisor is giving investment advice to the participants. I do not know how specific or tailored it is to each participants."

"to the participants".

[Don Levit]

gdburns:

Kirk supplied information about rendering advice to the plan, not to the participants.

Don Levit

[Guest gdburns]

Weren't Santo Gold and the other posters discussing rendering advice to the participants?

[Don Levit]

gdburns:

Exactly. The advisors were merely performing their roles as advisors, not fiduciaries.

Consultants can give similar advice to individuals that are not even participants in an ERISA plan.

The key to determining fiduciary status is discretionary authority or control over plan assets, not authority or control over plan participants.

Don Levit

[E as in ERISA]

Santo - Are they saying he is not a fiduciary -- or that if he is a fiduciary they will hold him harmless from liability. They might also want to think about prohibited transaction rules. A fiduciary to the plan should generally not provide investment advice to participants under current law. There is proposed legislation that would change that. Title VI of HR 2830. But the proposal is somewhat controversial. And one of the concerns is a situation similar to what you describe. An advisor getting asset based fees for helping the employer set up the plan and the investment funds. Then the advisor helps participants choose among funds. There is perceived to be a potential conflict of interest if the amount of fees that the advisor receives for helping the plan are affected by what funds he advises the participants to choose. If he directs participants into the funds paying the highest percentages the advisor gets more. If your facts are such that they would be governed by the proposed legislation I wouldn’t do this until if and when the legislation is passed.

[Guest mjb]

There are two separate fiduciary issues here.

1. Is the advisor a fiduciary under applicable regulatory standards for the product /advice given, e.g. stockbroker, RIA, CFP, etc? There are different fiduciary rules for different advisors and there is little agreement on who is a fiduciary. In April 2005 the SEC promulgated a rule which allows stockbrokers to be exempted from being regulated as advisors if the advice is incidental to the selling of an investment product. The Nov 2005 Journal of Financial Planning P 38-48 has an extensive article on this issue regarding the diversity of views of who is a fiduciary to the client.

2. Is the advisor a fiduciary under ERISA? Providing advice for a fee makes one a fiduciary to the employee but under the 404© regs the plan fiduciary will not have fiduciary liability for investment advice given by the advisor (examples 8, 9 and 10).

[Guest gdburns]

Don,

You miss the point. I also cannot understand what you could mean by "Exactly" since your post and mine are addressing 2 different issues.

Read the last posts by mjb and E as in ERISA. Also read the Prudential newsletter and the article in the Journal of Financial Planning.

The Prudential newsletter, the Journal article and the SEC promulgation are addressed mainly to those selling investment products to plan participants NOT to plan sponsors.

Those selling to plan participants have no discretionary authority or control over plan assets. They exert infuence on and issue advice to plan participants. Those things are what the articles etc warn about doing and point out the problems that they create if not done properly.

The fiduciary issue that the rest of us are talking about is not the same what you are talking about.

There are rules and laws (NASD, SEC and state securities) that dictate what and how a "consultant" can tell or advise an individual, whether that individual is a participant in an ERISA plan or not.

[GBurns]

EBIA Summary:

http://www.ebia.com/WeeklyArchives/401k/Statutes/18307

DoL Advisory Opinion:

http://www.dol.gov/ebsa/regs/aos/ao2005-23a.html

[Don Levit]

GBurns:

Thanks for adding this material.

Also, look at today's Benefits Link, search the news.

Scroll down to the story, "Bill Lets Fund Firms Give Advice on 401(k)s."

Don Levit