Son as Financial Advisor

[Zoey]

Picture it if you will...

Husband owns 100% of the company.  Wife works at the company and is a trustee of the plan as well (yes, owner by stock attribution).  The wife has a son from a prior marriage (not adopted by the "new" husband).  The wife would like to hire her son as the financial advisor for the husband's 401(k) plan (that has employees...not a solo), so that the son can receive the commissions/fees.  The 401(k) plan allows for self-directed accounts.  Everything I read is very gray.  I read that it is unacceptable, but then goes on to say unless the fees are reasonable, etc.  Assuming that the fees would be reasonable, is this allowed?  Every fiber of my being says it's unethical from a fiduciary standpoint, and should be a prohibited transaction with a party of interest, but this client is going to want "proof" that it is not allowed.  Opinions?  Cites?  Thanks so much!

[jpod]

Most likely the fiduciary with authority to hire a financial advisor for the plan would engage in a 406(b) prohibited transaction by hiring the wife's son.  Don't get bogged down in issues of whether the son is a party in interest to the plan; that's not required to have a PT here.   

[MoJo]

I don't have my research available anymore, but I had to go through this a number of years ago where the daughter was the FA.  It clearly is a PT, and the easiest tack would be for you to suggest that the son's B/D or RIA to provide a written statement that it is NOT.  That would be the best protection (and they aren't going to do it...).

[jpod]

Are you suggesting that the responsible fiduciary should proceed to hire the son in the unlikely event his firm provides such a statement?  I was being kind but this is classic 406(b)(1) self-dialing PT, so I wouldn't care what his firm says. 

[My 2 cents]

Even if it is not a prohibited transaction, it would be a bad idea unless a good case can be made that the son is just about the best investment advisor around.  The choice of an investment advisor is, without question, a fiduciary act!

Are they still paying commissions to investment advisors for 401(k) plans?  How is that defensible?

[MoJo]

1 hour ago, jpod said:

Are you suggesting that the responsible fiduciary should proceed to hire the son in the unlikely event his firm provides such a statement?  I was being kind but this is classic 406(b)(1) self-dialing PT, so I wouldn't care what his firm says. 

I would never suggest that - because I can't even imagine that a B/D would ever make such a representation....  If they did, I'd turn them in to the DOL/SEC/FINRA and Good Housekeeping to have their Seal of Approval revoked.

I'm merely suggesting that instead of proving it can't be done, make them prove it can be (and clearly, at least in my mind,it is a PT).  Unless it's Joe's Car Emporioum and Brokerage House, they wouldn't even think of allowing one of their brokers to do it.

[Zoey]

Hahahaha MoJo...Maybe it is Joe's Car Emporium and Brokerage House.  

I too, have expressed that it was a bad idea.  What happens to the family if/when the FA is fired as their FA?  The drama alone is reason enough.  But the first thing I thought, was that it was a PT.  I like the idea of having them prove that it can be done, rather than me proving that it can't, because this employer is going to want something that states that they can or can't hire her son, and that would take it out of my hands.

Thank you everyone for your responses!  Y'all rock!

[TPAJake]

Any time I get a question like this from a client, I immediately chuckle (loud enough they can hear me), say NONONO, then bluntly ask them if they think that passes the smell test.  I mean come on, they knew the answer before they asked.  Anything you give them in writing has an equal chance of being self-protection for you or ammunition for them, so stick to regs & published guidance if you give them anything at all...I wouldn't.  

[Zoey]

TPAJake, that is exactly the spot I am in.  If I tell them a flat out no, and they find some loophole, it will come back to bite me.  All I can do is tell them what I think (based on the regs as I interpret them) and put it back on the FA/RIA.

It never ceases to amaze me, the questions that some ask.  This employer thought there wouldn't be any problem at all with it.