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RIAs Run Risk of Falling Short on DOL Rule Compliance

Some legal experts say RIAs are not doing enough to comply with the new rule, especially when it comes to rollover advice.

The Department of Labor’s new fiduciary exemption rule went into effect as scheduled in February, to the surprise of some who thought the Biden administration would stop the Trump-era rule from taking effect. And while much of the focus has been on how the brokerage industry will comply with the rule, some legal experts say registered investment advisors are not doing enough to comply, especially when it comes to rollover advice. One Charles Schwab executive called it a “sleeper issue” for such advisors.

The rule’s “safe harbor” expires on Dec. 20, and it will take some time for RIAs to get in compliance before then. In an interview with, Bradford Campbell, a partner with the law firm Faegre Drinker, was particularly concerned for smaller RIAs that lack the kinds of compliance departments of larger firms.

“They may not realize all of the steps that need to get done by December to be prepared for that changeover,” he said. “By December, you won’t have a fallback if you don’t meet the conditions.”

The DOL rule concerning fiduciary recommendations under ERISA had been under consideration for some time. After the 5th U.S. Circuit Court of Appeals vacated the Obama administration’s fiduciary rule in 2018, the Trump administration, under Labor Secretary Eugene Scalia, released its own proposed version in June 2020, which was finalized last December

The rule offers fiduciaries an exemption for certain prohibited transactions under ERISA provided they adhered to a number of “impartial conduct standards.” These include a best interest standard for investment advice, a demand for “reasonable compensation” stemming from that advice and a ban on misleading statements about services. The rule also asserted that the court’s decision on the Obama administration’s rule reestablished the DOL’s 1975 “five-part test” to determine whether particular recommendations fell under ERISA fiduciary status.

One of the more surprising aspects of the proposed rule was the potential expansion of how rollover recommendations would be subject to ERISA. Among other points, the five-part test states that advice has to be part of an “ongoing relationship” between client and advisor to qualify, but further DOL guidance clarified that rollover recommendations could always be considered part of an ongoing relationship. This would be true even if the recommendation is made during the first meeting between the client and the advisor, because both parties might presume more advice will be forthcoming when that advisor helps the client manage their assets in an IRA. According to Campbell, this reading would drastically expand the number of RIAs offering advice that would fall under ERISA scrutiny.

“Most times in the past, that would not have been ERISA fiduciary advice ... but now, most of the time, it will be ERISA fiduciary advice, because you intend to give them ongoing advice,” he said. “The only real exception is a one-time sales recommendation, and that’s typically not what RIAs are doing. For most RIAs, their business model is ongoing advice.”

If an RIA recommends a rollover, it would be managing that money and earning a fee, which would be considered a conflict, according to Christopher Gilkerson, a senior vice president and general counsel at Charles Schwab. Additionally, there are new disclosures both advisors and b/ds will have to deliver to clients around the time they make a rollover recommendation, he said.

“You have to acknowledge your fiduciary status in that rollover conversation, and you have to produce a written description of your services and conflicts of interest,” he said. “An advisor’s ADV should do the trick there, but you also have to explain in writing why that rollover will be in the client’s best interest.”

RIAs will also need to make the case that the rollover recommendation is in the best interest of the client, especially if fees increased after the rollover, according to Fred Barstein, the founder of The Retirement Advisor University. If an RIA is recommending that a participant roll over from a 401(k) to an IRA, and the participant will be paying greater fees as a result, Barstein said that RIAs need to understand the defined contribution plans when discussing them with the clients.

“You can’t say it’s in the best interest to roll over unless you know what you’re rolling out of,” he said. “Number one, that’s going to be a lot of extra work, and number two, it’s not going to be easy to make the case that a participant should roll out of the plan.”

For RIAs who work with companies advising them on plans, this kind of scrutiny is not new, but the rule will also capture wealth planners offering advice in the course of a long-term relationship, according to Campbell. He believed the biggest potential for compliance lapses was with smaller RIAs. If a firm’s business is in personal financial planning, rollover recommendations are likely to be an important part of many conversations about retirement, and across an RIA’s client portfolio, Campbell believed advisors may face questions about rollovers on a daily basis.

“If I’m a personal wealth manager at a large RIA, they’ll tell me what to do,” he said. “I’m really thinking of those smaller RIAs who don’t do a lot of plan work who are the ones with the most potential to not realize how big an issue this can be for them."

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