Best Interest Standard of Care for Advisors #18

Regulation Best Interest: Rollover Recommendations for Investment Advisers (Rollovers Part 4)

The SEC has issued its final Regulation Best Interest (Reg BI), Form CRS Rule, RIA Interpretation and Solely Incidental Interpretation. I am discussing the SEC’s guidance in a series of articles entitled “Best Interest Standard of Care for Advisors.”


In earlier posts (e.g., Best Interest for Advisors #15), I discussed the application of Reg BI, and its Best Interest Standard of Care, to rollover recommendations. However, the requirement to act in the best interest of a plan participant for rollover recommendations is not limited to broker-dealers; it also applies to investment advisers. That was explained in the SEC’s Interpretation Regarding Standard of Conduct for Investment Advisers, issued June 5, 2019 and effective on July 12, 2019.

In that guidance, the SEC explained its view that:

“An adviser’s fiduciary duty applies to all investment advice the investment adviser provides to clients, including advice about investment strategy, engaging a sub-adviser, and account type. Advice about account type includes advice about whether to open or invest through a certain type of account (e.g., a commission-based brokerage account or a fee-based advisory account) and advice about whether to roll over assets from one account (e.g., a retirement account) into a new or existing account that the adviser or an affiliate of the adviser manages.” 

The SEC explained that the investment adviser best interest standard covers the recommendation to rollover, the account type for the rollover, and the investments in the IRA.

We consider advice about ‘‘rollovers’’ to include advice about account type, in addition to any advice regarding the investments or investment strategy with respect to the assets to be rolled over, as the advice necessarily includes the advice about the account type into which assets are to be rolled over.” 

Unfortunately, though, the SEC did not go into any detail in the Interpretation about the requirements for a best interest recommendation. In a footnote, though, it gave this limited guidance about prospective clients, e.g., a participant who is not yet a client of the adviser:

We believe that, in order to avoid liability under this antifraud provision, an investment adviser should have sufficient information about the prospective client and its objectives to form a reasonable basis for advice before providing any advice about these matters. At the point in time at which the prospective client becomes a client of the investment adviser (e.g., at account opening), the fiduciary duty applies. Accordingly, while advice to prospective clients about these matters must comply with the antifraud provisions under section 206 of the Advisers Act, the adviser must also satisfy its fiduciary duty with respect to any such advice (e.g., regarding account type) when a prospective client becomes a client.”

However, the SEC did go into detail in Reg BI about the requirement for a best interest rollover recommendation by broker-dealers. Since the rules for investment advisers and broker-dealers are converging, the term “best interest” likely means the same thing for broker-dealers and investment advisers for this purpose. As a result, investment advisers should look to the SEC’s rollover discussion in Reg BI. My earlier post, Best Interest for Advisors #15, discussed the relevant considerations and the process.

In the RIA Interpretation, the SEC also explained that investment advisers must evaluate their “account types” (of which IRAs would be one), and tell the participant if a rollover is not in the participant’s best interest.

“In providing advice about account type, an adviser should consider all types of accounts offered by the adviser and acknowledge to a client when the account types the adviser offers are not in the client’s best interest.”

Furthermore, if an adviser is dually-licensed, the adviser must look at all of the reasonably available account types of both the RIA and the broker-dealer to find the account type that is in the best interest of the participant (assuming that a rollover is in the best interest of the participant). If none of those account types is in the best interest of the participant (that is, if a rollover would not be in the best interest of the participant), the adviser must acknowledge that to the participant:

“Accordingly, in providing advice to a client or customer about account type, a financial professional who is dually licensed (i.e., an associated person of a broker-dealer and a supervised person of an investment adviser (regardless of whether the professional works for a dual registrant, affiliated firms, or unaffiliated firms)) should consider all types of accounts offered (i.e., both brokerage accounts and advisory accounts) when determining whether the advice is in the client’s best interest.” 

In future articles, I will explore the process for determining whether a rollover is in the participant’s best interest, as well as the conflict of interest issues and disclosures.

However, before ending this article, I want to make two more points.

First, a rollover recommendation almost lways involves a conflict of interest which must be disclosed by the investment adviser. That’s because, in the typical case, the adviser will receive a fee from the rollover IRA, but will not earn a fee if the money stays in the plan. In reviewing investment advisers’ ADVs Part 2A, I have noticed that few are making that disclosure.

Second, the SEC Interpretation, unlike the DOL fiduciary rule, applies to all plans, not just ERISA-governed plans. That means that recommendations of rollovers to participants in government plans, church plans and one-person plans are covered by the RIA Interpretation and best interest standard.

Forewarned is forearmed. I expect the SEC to be looking at rollover recommendations in the future.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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