Category: prudent


Interesting Angles on the DOL’s Fiduciary Rule #25

Posted on October 25, 2016, by Fred Reish in BICE, DOL Activity, fiduciary, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #25

Reasonable Compensation Versus Neutral Factors

This is my twenty-fifth article covering interesting observations about the fiduciary rule and exemptions.

In my last post, I wrote about the Best Interest Contract Exemption (BICE) and the requirements for “neutral factors” and “differential compensation” between “reasonably designed investment categories.” As I pointed out, the purpose of neutral factors is to determine the relationship of compensation between different categories of investments and services. In other words, neutral factors don’t establish a dollar amount of compensation, but instead they are used for determining the relative compensation between different reasonably designed investment categories. Think of it as evaluating degree of difficulty in terms of work, complexity, value, etc.

But that begs the question, if neutral factors are used to establish the ratio of compensation, how is the compensation determined?

The best way to approach that question is to look at … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #24

Posted on October 20, 2016, by Fred Reish in BICE, Broker-Dealers, DOL Activity, fiduciary, prohibited transaction, prudent, Registered Investment Advisers, RIA. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #24

The Meaning of Differential Compensation Based on Neutral Factors

This is my twenty-fourth article covering interesting observations about the fiduciary rule and exemptions.

The DOL’s fiduciary “package” consists of a regulation that expands the definition of advice and exemptions, or exceptions, from the prohibited transaction (PT) rules. If a recommendation by a fiduciary adviser does not constitute a PT (e.g., does not affect the adviser’s compensation, or that of an affiliate, and does not cause a payment from a third party), no exemption is needed. However, if the fiduciary recommendation causes a PT, an exemption must be used – and most often that will be BICE – the Best Interest Contract Exemption. Therein lies the rub . . . the compensation of the financial institution (e.g., the broker-dealer) and the adviser are regulated by BICE.

Under BICE, the compensation of broker-dealers can be … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #23

Posted on October 11, 2016, by Fred Reish in DOL Activity, fiduciary, prohibited transaction, prudent, Registered Investment Advisers, RIA. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #23

This is my twenty-third article about interesting observations concerning the fiduciary rule and exemptions.

When the definition of fiduciary advice is expanded on April 10, 2017, the investment and insurance recommendations of a much larger group of advisers will be classified as fiduciary advice and will, as a result, increase the focus on financial conflicts of interest (which ERISA and the Internal Revenue Code refer to as “prohibited transactions,” or PTs). My suspicion is that, for most ERISA retirement plans, there will not be a great impact on advisers—because, to a large degree, advisers to retirement plans already are acknowledged fiduciaries. (To be fair, though, there will be some impact . . . particularly on smaller plans, where some insurance companies and broker-dealers have, in the past, taken the position that their advisers are not fiduciaries. Nonetheless, based on my recent … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #21

Posted on September 28, 2016, by Fred Reish in BICE, DOL Activity, fiduciary, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #21

This is my twenty-first article covering interesting observations about the fiduciary rule and exemptions.

While most of the requirements in the new fiduciary rule and exemptions are “old news” for retirement plan advisers, they may require significant changes for advisers to IRAs. For example, ERISA’s prudent man rule and the new best interest standard of care both require that fiduciary advisers (which will include virtually all advisers to plans, participants and IRA owners when the rules are applicable on April 10, 2017) engage in a prudent process to develop recommendations. Using variable annuities as an example, here are some of the important steps in a prudent process: evaluating whether the insurance company will be able to satisfy its commitments in the future (based on today’s information); a determination of whether the expenses for the variable annuity contract, including expenses of the … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #20

Posted on September 20, 2016, by Fred Reish in DOL Activity, fiduciary, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #20

As I discussed in an earlier post (Angles #7), the Best Interest Standard of Care has three parts: The prudent man rule; a requirement for individualization; and a duty of loyalty. Notice that none of the three parts requires that the “best” investment be recommended

Because of concerns that the fiduciary rule might be interpreted to require that a “best” investment requirement would apply, the Department of Labor explained in the preamble to the fiduciary regulation that:

In response to commenter concerns, the Department also confirms that the Best Interest standard does not impose an unattainable obligation on Advisers and Financial Institutions to somehow identify the single ‘‘best’’ investment for the Retirement Investor out of all the investments in the national or international marketplace, assuming such advice were even possible. 

So, if you ever had any doubts, it should be clear … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #19

Posted on September 13, 2016, by Fred Reish in DOL Activity, fiduciary, prudent, Uncategorized. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #19

This is my nineteenth article about interesting observations about the fiduciary regulation and the exemptions.

In an earlier post (Angles #16), I described how advisers could use the “hire me” approach to explain their services and fees without becoming a fiduciary for that purpose. Generally stated, under that approach, an adviser could explain his services and fees, but could not discuss specific products or platforms. In other words, if the adviser “suggested” specific products or platforms, the adviser would become a fiduciary even under “hire me.” The DOL explained that result in the preamble to the fiduciary regulation:

“An adviser can recommend that a retirement investor enter into an advisory relationship with the adviser without acting as a fiduciary. But when the adviser recommends, for example, that the investor pull money out of a plan or invest in a particular … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #18

Posted on September 7, 2016, by Fred Reish in BICE, DOL Activity, fiduciary, prohibited transaction, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #18

As advisers who work with ERISA-governed retirement plans already know, an adviser’s compensation cannot be more than a reasonable amount. Because of the new fiduciary advice regulation, and the associated prohibited transaction exemptions (84-24 and the Best Interest Contract Exemption (BICE)), that requirement is being imposed on investment and insurance recommendations to IRAs. Interestingly, under the Internal Revenue Code (section 4975(d)(2)), it is already a prohibited transaction for an adviser to earn more than reasonable compensation from an IRA. However, because of lack of enforcement by the IRS, that requirement is often overlooked. As evidence of the fact that it is overlooked, think about the lack of benchmarking or similar services to help advisers determine if their compensation from an IRA is reasonable. But, that is about to change.

To appreciate the “reasonable compensation” requirement, a person needs to understand that … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #15

Posted on August 9, 2016, by Fred Reish in BICE, DOL Activity, fiduciary, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #15

This is my fifteenth article about interesting observations “hidden” in the fiduciary regulation and the exemptions.

In my last post (Angles #14), I said that the prudent process requirement would apply to many, but not all, advisers. This article explains that statement.

ERISA does not apply to individual IRAs (but does apply to SEP and SIMPLE IRAs). As a result, ERISA’s prudent man rule does not govern the conduct of advisers when providing investment advice to individual IRAs.

However, when the Best Interest Contract Exemption (BICE) applies to “conflicted” advice on April 10, 2017, those advisers will need to, among other things, satisfy the Best Interest standard of care (which is, in its essence, a combination of ERISA’s prudent man rule and duty of loyalty). In effect, conflicted advisers will be bootstrapped into a prudent process requirement. (As background, a “conflicted” fiduciary adviser … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #14

Posted on August 2, 2016, by Fred Reish in DOL Activity, fiduciary, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #14

This is my fourteenth article about interesting observations “hidden” in the fiduciary regulation and the exemptions.

When the new fiduciary regulation applies on April 10, 2017, anyone who makes investment recommendations or investment “suggestions” to retirement plans will be a fiduciary adviser. As a result, the adviser must engage in a prudent process for developing those recommendations. However, that is not a dramatic change for many advisers, since they already serve as fiduciaries and use prudent process.

But, the same rules will apply to many advisers to IRAs. (In my next blog I will explain why I say “many” rather than “all.”) As a result, advisers to IRAs will also need to use prudent processes to develop their investment recommendations.

What does that process look like? The DOL explains:

“Thus the prudence standard, as incorporated in the Best Interest standard, is an … Read More »


Interesting Angles on the DOL’s Fiduciary Rule #9

Posted on June 14, 2016, by Fred Reish in DOL Activity, fiduciary, prudent. Comments Off on Interesting Angles on the DOL’s Fiduciary Rule #9

This is my ninth article about interesting observations “hidden” in the fiduciary regulation and the exemptions.

As I explained in an earlier post, there are three parts to the best interest standard . . .

Prudence: “. . . the fiduciary acts with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, . . .”
Individualization: “. . . based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor, . . .”
Loyalty: “. . . without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”

The question for this “angles” article is, what is the difference … Read More »




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