Category Archives: DOL

Interesting Angles on the DOL’s Fiduciary Rule #23


DOL, fiduciary, prohibited transaction, prudent, registered investment advisers

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 experience in working with broker-dealers, the adjustments are being made without a great deal of difficulty.)

On the other hand, the impact on advisers’ practices with IRAs will be significant. That is particularly true of investment and insurance services provided by broker-dealers. But, it is also true, to a lesser degree, of the services provided by RIAs. (Note: This article does not discuss recommendations to participants to take distributions and roll over to IRAs or recommendations to IRA owners to transfer their IRAs. Significant changes will be required for both RIAs and broker-dealers for those recommendations.)

One of the biggest changes—because of the fiduciary prohibited transaction rules—is that advisers will no longer be able to make recommendations that can affect the level of their compensation. An obvious example is that an adviser could not recommend a proprietary mutual fund (managed by an affiliate) without committing a prohibited transaction. That’s because a recommendation cannot increase the compensation of the adviser, his supervisory entity (e.g., a broker-dealer), or any affiliated or related party. Another example is that a financial adviser with a broker-dealer could not recommend that an IRA invest in mutual funds which pay different levels of 12b-1 fees to the broker-dealer and, indirectly, to the adviser. In effect, the adviser would be setting his own compensation (as well as the compensation of the supervisory entity). Similar issues exist for referral fees, revenue sharing, and so on. In all of those cases, the broker-dealer will need to either move to a level fee environment or to satisfy one of the prohibited transaction exemptions (most likely BICE—the Best Interest Contract Exemption).

Similar issues exist for RIAs. For example, we have seen cases where RIAs recommend proprietary products (e.g., affiliated mutual funds). That is a prohibited transaction. Another example of an RIA prohibited transaction is where the adviser recommends an allocation to fixed income and an allocation to equities, but then charges a higher fee for managing the equities. By virtue of recommending the allocations, the adviser has determined the level of its compensation . . . and, therefore, has committed a prohibited transaction.

The moral of this story is that broker-dealers and RIAs need to closely review their investment practices for qualified money. (“Qualified” money is the new terminology for money in IRAs or plans. It is an easy reference to the types of accounts that are subject to the new rules.) Since virtually all investment and insurance advice to IRAs and plans (including recommendations about distributions, withdrawals and transfers) will become fiduciary advice on April 10, 2017, two steps should be taken. First, if they don’t already exist, processes need to be put in place so that any advice satisfies the prudent person requirement. Generally speaking, that process should result in portfolio investing. Second, all payments for the advice (including indirect and non-cash compensation, whether to the adviser, the supervisory entity or any affiliates or related parties) needs to be examined. Once these rules are applicable, the compensation arrangements will need to satisfy the prohibited transaction rules in section 406(b)(1) and (3) of ERISA and the corresponding provisions in section 4975 of the Internal Revenue Code. Or, in the alternative, the condition of a prohibited transaction exemption must be satisfied.

And, all of that needs to be done by April 10, 2017.

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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Interesting Angles on the DOL’s Fiduciary Rule #22


BICE, DOL, fiduciary, prohibited transaction

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

While the application of the new fiduciary rule and prohibited transaction exemptions to broker dealers and investment advisers is fairly obvious — if not fully understood, there has been little in the way of discussion about its application to banks. This post highlights some of those issues.

In a prior Angles article, I talked about how the fiduciary rule applies to referrals of advisers and how the prohibited transaction rules impact solicitors’ fees (see Angles No. 12). There is a similar issue for banks. For example, it appears to be a fairly common practice for employees at bank branches to recommend that customers set up IRAs and put the money into certificates of deposit, and for the bank employees to receive bonuses for the IRAs investments in the CDs (or, alternatively, to receive credits towards bonuses based on a variety of factors, including the IRA investments). Based on the wording of the new fiduciary rule, if a bank employee recommends that an IRA invest in a certificate of deposit, and is compensated directly or indirectly for that recommendation, it is a fiduciary act for compensation. (The bonus, or bonus credit, is the compensation.) Since the bank employee is being paid compensation that is not stated and level, the payment is a prohibited transaction. That means that an exemption is needed. (There are differing opinions within the banking community about whether a bank deposit exemption is available. The specific issue is whether the bank deposit exemption covers the payment to the employee.)

To complicate matters, what if the bank customer is retiring and asks about rolling over his 401(k) account? If the bank employee recommends a rollover, that would be fiduciary advice under ERISA. As such, the bank and its employee would need to develop the recommendation through a prudent process, considering at the least the investments, services and expenses in the plan and the proposed IRA. In addition, the recommendation could be a prohibited transaction, and an exemption would be needed.

The story doesn’t end there. Similar referral and compensation arrangements also exist for referrals to a bank’s trust department, affiliated investment adviser and affiliated broker-dealer. While the Best Interest Contract Exemption is generally available for compensation for these types of referrals, it may be difficult for banks to comply, since the cost and effort of BICE compliance can be significant, but the amounts paid under these referral arrangements are, at least for each individual referral, relatively small.

As we continue working with clients on compliance issues for the new rules, it is becoming increasingly clear that there are a significant number of unanticipated consequences.

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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Interesting Angles on the DOL’s Fiduciary Rule #21


BICE, DOL, fiduciary, prudent

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 underlying mutual funds, are reasonable; and determining what portion of an investor’s financial assets should be allocated to the annuity. To do that job, fiduciary advisers will need to gather the information necessary to make an appropriate recommendation and then prudently evaluate that information. Stated slightly differently, there is a duty to investigate. The DOL described that responsibility in the preamble to the best interest contract exemption (BICE):

This is not to suggest that the ERISA section 404 prudence standard or Best Interest standard, are solely procedural standards. Thus, the prudence standard, as incorporated in the Best Interest standard, is an objective standard of care that requires investment advice fiduciaries to investigate and evaluate investments, make recommendations, and exercise sound judgment in the same way that knowledgeable and impartial professionals would.

Here are two more thoughts on that. First, the DOL has historically taken the position that a prudent process for advice to retirement plans must be documented. That could easily be extended to advice to IRAs as well. In fact, there is a specific documentation retention requirement under BICE. Second, there is an argument that, if a fiduciary adviser cannot obtain – through the investigation – enough information to formulate a prudent recommendation, the adviser needs to abstain from making a recommendation. One obvious example is where an adviser is developing a recommendation to a participant to take a distribution and roll it over into an IRA. In that situation, BICE specifically requires that the adviser consider the investments, expenses and services in the plan, and then compare them to the investments, expenses and services in the proposed IRA. The best interest analysis must be documented by the adviser. If the adviser cannot obtain adequate information about the investments, expenses and/or services in the plan, it would be difficult, if not impossible, to make and document that analysis.

As I said earlier in this article, for a retirement plan perspective, this is not a new requirement. Instead, these are long standing rules. However, for IRAs the fiduciary guidance will, in many cases, require changes in processes and practices. Since IRAs are smaller than plans, and therefore can’t afford to pay as much money for services, advisers and their supervisory entities need to develop efficient processes for gathering information and performing the analysis. I suspect this will lead to new programs and computer-based systems.

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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Interesting Angles on the DOL’s Fiduciary Rule #20


DOL, fiduciary, prudent

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 now that the “Best” Interest Standard of Care is just a label (but a label which, at some level, resonates politically).

If the requirement isn’t that the best investment be recommended, what is it? The answer is that it’s the same standard that advisers have used for about 40 years in recommending investments to ERISA-governed, tax-qualified retirement plans. In other words, it’s been around for a long time and many advisers have survived and thrived under that standard. As the DOL explained in the guidance:

The Best Interest standard . . . is intended to effectively incorporate the objective standards of care and undivided loyalty that have been applied under ERISA for more than 40 years.

But, the duty of prudence should not be confused with the suitability standard. While unsuitable recommendations will not be prudent, it does not necessarily mean that suitable recommendations will be prudent. As the DOL explained:

The Department has not specifically incorporated the suitability obligation as an element of the Best Interest standard, as suggested by FINRA but many aspects of suitability are also elements of the Best Interest standard. An investment recommendation that is not suitable under the securities laws would not meet the Best Interest standard.

As a result, advisers who have not worked with retirement plans under ERISA’s prudent man rule should consider education about the processes required for compliance with the fiduciary standard.

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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Interesting Angles on the DOL’s Fiduciary Rule #19


DOL, fiduciary, General, prudent

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 fund, that advice is given in a fiduciary capacity even if part of a presentation in which the adviser is also recommending that the person enter into an advisory relationship. The adviser also could not recommend that a plan participant roll money out of a plan into investments that generate a fee for the adviser, but leave the participant in a worse position than if he had left the money in the plan. Thus, when a recommendation to ‘‘hire me’’ effectively includes a recommendation on how to invest or manage plan or IRA assets (e.g., whether to roll assets into an IRA or plan or how to invest assets if rolled over), that recommendation would need to be evaluated separately under the provisions in the final rule”

I mention this because I have recently seen some confusion about the extent and scope of “hire me.” As you might expect, it is because people want to extend “hire me” to all kinds of scenarios, and thereby limit their fiduciary status and legal exposure. For example, I was recently asked if an adviser could tell an IRA owner that the adviser would charge 1% per year to help select, manage, and monitor individual variable annuities. That might work if the IRA owner initially told the adviser that he wanted to hire someone to search for individual variable annuities. However, if the “suggestion” that an individual variable annuity would be appropriate comes from the adviser, that would likely result in fiduciary status for identifying the particular type of investment to be made (and, therefore, cause the loss of the non-fiduciary “hire me” approach).

So, as a word of warning, if you intend to use “hire me” to market your services, keep in mind that it is to describe your services and fees, but without a suggestion that any particular product, investment or platform, be used by the IRA owner.

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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Interesting Angles on the DOL’s Fiduciary Rule #18


BICE, DOL, fiduciary, prohibited transaction, prudent

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 the amount that is reasonable is determined based on the services that are provided. In its guidance, the DOL explains how reasonableness is to be determined:

“The reasonableness of the fees depends on the particular facts and circumstances at the time of the recommendation. Several factors inform whether compensation is reasonable including, inter alia, the market pricing of service(s) provided and the underlying asset(s), the scope of monitoring, and the complexity of the product. No single factor is dispositive in determining whether compensation is reasonable; the essential question is whether the charges are reasonable in relation to what the investor receives.”

However, there is a difference between “market” compensation and “customary” compensation. That difference is primarily whether the market is transparent and competitive:

“Ultimately, the “reasonable compensation” standard is a market based standard. As noted above, the standard incorporates the familiar ERISA section 408(b)(2) and Code section 4975(d)(2) standards. The Department is unwilling to condone all “customary” compensation arrangements and declines to adopt a standard that turns on whether the agreement is “customary.” For example, it may in some instances be “customary” to charge customers fees that are not transparent or that bear little relationship to the value of the services actually rendered, but that does not make the charges reasonable.”

As a hypothetical example . . . if an adviser provides a wide range of services, that might justify compensation of 1% per year of the assets under management. On the other hand, if an adviser provides a more limited range of services, that might be worth one-half of 1% per year (that is, 50 basis points). As a more specific example, BICE requires that advisers state whether or not they will be monitoring the investments on behalf of the IRA owner or plan. Obviously, all other things being equal, an adviser that provides fiduciary monitoring services is entitled to more money than one that does not.

With that understanding, the key question is, how will an adviser determine whether its compensation is reasonable? Most likely, it will be done in the same way that is in the 401(k) world. In other words, the value of services will be determined by the competitive marketplace. Since competitive market data is not generally available for IRAs, RIA firms and broker-dealers will need to work with service providers who have that information. In the 401(k) world, those are called benchmarking services.

The better benchmarking services will consider both the range of services and the compensation of the adviser. As explained above, the calculation of reasonable compensation is based on the services provided, but not just on the size of the account. In that regard, there will need to be a range of benchmarking alternatives, for example, discretionary investment advice for individual securities; discretionary investment advice for mutual funds; non-discretionary advice for both of those scenarios; recommendations for the purchase of individual annuities, including evaluations that take into account the different types of annuities (e.g., fixed rates annuities, fixed indexed annuities, and variable annuities); referrals to discretionary investment managers; and so on. The benchmarking will need to consider services and compensation in the first year and in subsequent years (for example, will the adviser be monitoring the investments).

While the services do not exist today, it is likely that they will in the relatively near future, say, in the next six to 12 months.

Forewarned is forearmed. Advisers need to be attentive to these issues, now that they are front and center.

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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Interesting Angles on the DOL’s Fiduciary Rule #17


BICE, DOL, fiduciary

Much attention has been given to the new fiduciary rules (applicable April 10, 2017) for recommending distributions from retirement plans and rollovers to IRAs. Where the adviser making the recommendation is a “Level Fee Fiduciary,” the new requirements are sometimes referred to as “BICE-lite,” because only certain of the requirements of the Best Interest Contract Exemption must be satisfied. However, where the adviser will not be a Level Fee Fiduciary, the adviser and his Financial Institution (e.g., broker-dealer or RIA) must comply with all of the BICE conditions.

However, not much attention has been paid to the other BICE-lite recommendations—a recommendation to transfer an IRA from another adviser and a recommendation to change from a transaction-based account to a fee-based account. This article discusses the first of those two . . . a recommendation to transfer an IRA.

The starting point is to know that the fiduciary regulation says that a recommendation to transfer an IRA is a fiduciary act. More specifically, it says that fiduciary acts include:

“…recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made.”

The next step is to understand that the recommendation will almost necessarily result in a financial conflict of interest, which the Internal Revenue Code refers to as a prohibited transaction. In other words, a receipt of compensation as a result of the recommendation is prohibited. Fortunately, though, there is an exception, which the Code calls an exemption, that if its conditions are satisfied, allows the adviser to receive compensation on a transferred IRA. The exemption is BICE.

BICE-lite has several requirements, including that the adviser receive only reasonable compensation, that no misleading statements be made, and that the recommendation to transfer the IRA satisfy the best interest standard of care. However, the most demanding requirement is that the adviser document why the recommendation is in the best interest of the investor. (More accurately, BICE-lite requires that the Financial Institution—for example, the broker-dealer or RIA firm—document why the recommendation is in the best interest of the investor.) To quote from the exemption:

“…in the case of a recommendation to rollover from another IRA or to switch from a commission-based account to a level fee arrangement, the Level Fee Fiduciary documents the reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee.”

In doing the analysis to determine whether the recommendation is in the IRA owner’s best interest, BICE specifically requires that the adviser consider the services offered in the existing IRA and the services that the adviser will offer in the new IRA. In that regard, it would be risky to document the “best interest” recommendation without some specific consideration of the services. However, that is not the end of the story. The rule more generally requires that the adviser act in the best interest of the IRA owner, which could involve other considerations. For example, the general rule for a prudent process is that the fiduciary adviser consider the “relevant” factors. (Those are the factors that a hypothetical knowledgeable person would want to review in making the decision.) The best interest standard also requires that the adviser consider the needs, circumstances, objectives and risk tolerance of the IRA owner.

So, what does all of that mean? While there could be a number of ways of satisfying the requirements, I believe that one way—and probably a good way—is to have procedures, forms and services for gathering and evaluating the information and for documenting why the analysis of that information results in a recommendation that the transfer (or not transferring) is in the best interest of the IRA owner.

Also, while BICE does not specifically discuss the analysis that needs to be made if the adviser will not be providing “Level Fee Fiduciary” advice to the IRA, the logical conclusion would be that the requirements are the same (in addition to satisfying the other conditions of BICE that do not apply to Level Fee Fiduciary advice).

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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Interesting Angles on the DOL’s Fiduciary Rule #16


DOL, fiduciary

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

Beginning April 10, 2017, the recommendation of almost any investment or insurance product to a plan, a participant or an IRA owner will be a fiduciary act. (While individualized recommendations are already fiduciary acts, the definition of advice will be extended to include a “suggestion” that the advice recipient engage in, or refrain from, a particular course of action. In other words, the definition of fiduciary advice is being greatly expanded, and enforcement mechanisms are being added.) Also, a fiduciary recommendation includes a referral to a fiduciary investment adviser or manager. Since almost all advisers to plans, participants and IRA owners will be fiduciaries, that means that virtually any referral to an adviser will be a fiduciary act (where some compensation is associated with the referral).

But what if an adviser recommends himself? Not a problem!

The DOL has created the concept of “hire me” and explained that touting one’s own advisory services (as opposed to products or strategies) is not a fiduciary act. In the preamble to the fiduciary advice regulation the DOL said:

“It was not the intent of the Department, however, that one could become a fiduciary merely by engaging in the normal activity of marketing oneself or an affiliate as a potential fiduciary to be selected by a plan fiduciary or IRA owner, without making an investment recommendation covered by (a)(1)(i) or (ii).”

“Accordingly, a person or firm can tout the quality of his, her, or its own advisory or investment management services or those of any other person known by the investor to be, or fairly identified by the adviser as, an affiliate, without triggering fiduciary obligations.”

Advisers should be careful in using this approach. While it’s not fiduciary advice to explain one’s services and fees, if the discussion also includes the recommendation of a particular investment or strategy (or a rollover), that’s fiduciary advice.

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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Interesting Angles on the DOL’s Fiduciary Rule #15


BICE, DOL, fiduciary, prudent

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 is one with a conflict of interest, e.g., the advice can result in higher compensation or payments from third parties – such as 12b-1 fees or where proprietary investments are used.)

However, a pure level fee adviser does not have any financial conflicts and therefore will not need to use BICE. (A “pure level fee adviser” is one who charges a level fee, e.g., one percent per year, and neither the adviser, his supervisory entity nor any affiliated or related party receives any money or financial benefit on top of that fee.) Since a pure level fee, or non-conflicted, adviser won’t commit a prohibited transaction and therefore won’t need an exemption, that adviser will not be bound by the best interest standard for investment advice to individual IRAs. Instead, the adviser will only be subject to the conduct standards in the securities laws.

As a result, pure level fee advisers for IRAs won’t be affected by the new fiduciary rules . . . with a couple of notable exceptions. The biggest of those exceptions is a recommendation to a plan participant to take a distribution and roll over to an IRA with the adviser. But that is a subject for a future article.

For the moment, though, let me leave you with a positive thought. If you are a pure level fee adviser, your existing IRA clients, and your services to those clients, will not be affected by the new rules.

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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Interesting Angles on the DOL’s Fiduciary Rule #14


DOL, fiduciary, prudent

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 objective standard of care that requires investment advice fiduciaries to investigate and evaluate investments, make recommendations, and exercise sound judgment in the same way that knowledgeable and impartial professionals would. “[T]his is not a search for subjective good faith – a pure heart and an empty head are not enough.” Whether or not the fiduciary is actually familiar with the sound investment principles necessary to make particular recommendations, the fiduciary must adhere to an objective professional standard. Additionally, fiduciaries are held to a particularly stringent standard of prudence when they have a conflict of interest.”

In other words, fiduciary advisers are held to the standard by a hypothetical person who is knowledgeable about retirement investing. First and foremost, that means that the adviser must engage in a prudent process to formulate the recommendations to the investor. That includes an investigation of the needs, circumstances and objectives of the investor. A prudent process also includes application of generally accepted investment theories, such as modern portfolio theory. Courts have said that a prudent fiduciary would utilize prevailing investment industry practices in selecting investments (which could include consideration of costs and quality).

As good risk management, advisers should retain documentation of their process for developing their recommendations for at least six years.

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