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 between the prudence part of the Best Interest standard and the prudent man rule in ERISA?
Easy . . . one word. “Man” in ERISA was changed to “person” in the Best Interest standard. So, the prudent man rule has become the prudent person rule. It’s more modern and politically correct.
But, other than that, it is verbatim the same. That means that we have over 40 years of history of DOL guidance and fiduciary litigation to consider in applying the prudent person rule to IRA and rollover recommendations. Think in terms of generally accepted investment theories, (e.g., modern portfolio theory); reasonable costs; compensation that is consistent with services, not products. In terms of its impact, think of transparency, fee and expense compression, and competition.
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