After months of anticipation, the Department of Labor has released its revamped investment advice fiduciary definition. Dubbed the "retirement security proposed rule," the new standard would be used to determine when an advisor would be classified as a fiduciary for liability purposes under the Employee Retirement Income Security Act of 1974.
The new proposal, if finalized, would replace the current five-part test that is used to determine whether an investment advice professional is classified as an investment advice fiduciary. According to the DOL, the revised standard reflects that the retirement savings landscape has fundamentally changed since the five-part test was adopted in 1975.
In tandem with the newly proposed definition, the DOL has also proposed amendments to prohibited transaction amendments that are available to investment advice fiduciaries.
The proposed standard would greatly expand the reach of the investment advice fiduciary definition when compared to the five-part test — so advisors should pay close attention to both the proposal and ongoing developments in this area as the DOL evaluates comments.
Existing Five-Part Test for Fiduciary Status
Under the current standard, a person is an investment advice fiduciary to the extent he or she renders investment advice for a fee or other compensation, whether direct or indirect, with respect to any money or other property of a plan, or has any authority or responsibility to do so.
For fiduciary investment advice standards to apply, a person who is not otherwise a fiduciary must: (1) render advice 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.
Outline of New Investment Advice Standard
If the new DOL proposal becomes law, a financial services professional would be classified as an investment advice fiduciary if:
- The provider offers investment advice or makes investment recommendations to a retirement investor,
- The advice or recommendation is made for a fee or compensation and
- The financial services provider makes the recommendation within a professional relationship in which investors would reasonably expect to receive sound investment recommendations that are in their best interest.
The professional relationship prong may be based on whether the providers:
- Have discretion over investment decisions for the retirement investor,
- Make investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under "circumstances indicating" that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor's best interest or
- State that they are acting as a fiduciary when making investment recommendations.
The new rule would essentially gut the "regular basis" prong of the five-part test. Under the old rule, the inquiry was whether the advisor and client had regular contact, focusing on a more individualized relationship.
The new standard seems to focus more heavily on whether the advisor provides investment advice regularly as a part of the advisor's general business, regardless of the contact with the individual client.
