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  • Home>Practice Management>Fiduciary Focus>Breaking Down the 3 Key Elements of the DOL Fiduciary Rule

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    Breaking Down the 3 Key Elements of the DOL Fiduciary Rule

    Whether an advisor is subject to the rule depends on these definitions of 'fiduciary,' 'investment advice,' and 'compensation.'

    W. Scott Simon, 01/05/2017

    W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.


    Last month in this column, we explained that the Conflict of Interest Rule (Rule) promulgated by the U.S. Department of Labor on April 8, 2016, pertains to only one "kind" of the three kinds of fiduciaries described in section 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA), which can be thought of as "Fiduciary Central." That one kind of fiduciary--an ERISA section 3(21)(A)(ii) fiduciary--is a non-discretionary advice-giver.

    All three elements described in section 3(21)(A)(ii)--1) a fiduciary 2) that renders (non-discretionary) investment advice 3) for compensation--must be present in order for the Rule to apply to an advisor communicating with a plan participant or an IRA owner.

    Element 1: Fiduciary
    The Rule broadens the class of entities--which it defines as "Financial Institutions"--that will bear the "fiduciary" moniker come April 10. These include registered investment advisors, broker/dealers, banks, and insurance companies. This definition also includes any employees, contractors, agents, representatives, affiliates, or related entities of a given Financial Institution.

    Element 2: Investment Advice
    The Rule also broadens the definition of "investment advice." More precisely, "retirement investment advice" that's rendered to 1) participants in ERISA plans such as 401(k) plans, profit-sharing plans, money purchase pension plans, and defined benefit plans, as well as 2) owners of IRAs and participants in non-ERISA plans. Note that the Rule does not pertain to investment advice rendered to those investing in taxable accounts and non-retirement accounts. That retail environment remains within the purview of the SEC.

    Determining whether an advisor has rendered "retirement investment advice" in a given situation requires posing a threshold question: Has the advisor made a "recommendation" as defined by the Rule? If there's no recommendation, then there's no investment advice, and since, as noted, investment advice is one of the three elements of ERISA section 3(21)(A)(ii), an advisor's communication will not make it a fiduciary subject to the Rule.

    So how does the Rule define a "recommendation"?

    W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

    Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

    For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

    The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.