Worried About Fiduciary Rule? 2 Options for Brokers

Michael SmithFinancial Planning
Worried About Fiduciary Rule? 2 Options for Brokers
By Edge 401k Funds Managing Director Michael Case Smith
15 April 2015

A guy walks into a bar and says, “I am looking to buy a car. Can anyone help?”

Two fellows raise their hands.

The first offers to show the buyer one or two cars on his lot, both of which earn him a commission. The second offers to screen hundreds of cars on multiple lots to find the best fit in exchange for a flat fee.

This familiar car sales story accurately encompasses the fiduciary standard issue as I see it, currently the focus of discussion from Washington to Main Street as financial professionals and investors alike try to make sense of the latest proposal from the Department of Labor.


The question at hand comes down to this: Should brokers, who currently earn commissions when advising a 401(k) plan or participant, also be held to ERISA’s existing higher fiduciary standard for investment advisor representatives — those whom I believe remove conflicts of interest by charging a flat fee for their advice and investment recommendations?

After five years of intense lobbying and debate, the White House and Department of Labor finally proposed a rule on the issue of suitability versus fiduciary principles in providing investment advice. The proposed rule pulls in not only brokers working directly with 401(k) plan sponsors, but also  outside brokers advising participants in 401(k) plans – even if they have no connection with the plan itself.

As we enter the public comment period and the debate continues to unfold, here are two things 401(k) professionals and advisors need to keep in mind:

1. For those who work with 401(k) participants: The ability for a broker to maintain a commission business, while complying with the Obama administration’s proposal centers around a new  “best interest” contract exemption. If you or your firm cannot comply with the DoL’s new self-described fiduciary guiderails, you can leverage this exemption to keep your commissioned rollover business.

But a simpler path to compliance was actually put into effect years ago. ERISA Section 601 exempts brokers from fiduciary status as long as they follow investment advice provided by third-party computer models — a ruling which encompasses what we now know as robo advisors.

Still, there are hurdles for the computer model advice exemption described in the 2006 Pension Protection Act, such as an independent audit.

2. For those who work with 401(k) plans:  The other workaround is to forego a plan fee and instead be named the fiduciary advisor to participants, as also described in ERISA Section 601. Partner with a specialist who will handle plan-level work while you concentrate on advice for the C-suite executives and those with more complex issues. This structure is beneficial in multiple ways. Instead of your split of 15 to 50 basis points on plan assets and no access to rollovers, as the fiduciary advisor, you can charge for participant level advice and are free to capture rollovers.

The risk is that all levels of employees may take you up on your offer for advice, since you may not exclude those with lower balances. One emerging option is to encourage the plan sponsor to add a cost-effective financial wellness or education program for those with simple investment issues or those with minimal assets and significant debt and budgetary issues. (Full disclosure: Our firm offers this type of program.)

The bottom line is this: You cannot be subject to fiduciary rules if you do not have a fiduciary role. Bypass the fiduciary debate yet stay in the IRA rollover and 401(k) plan business by surrounding your practice with the “outsourced fiduciary” processes already in ERISA.

Michael Case Smith is managing director of Edge 401k Funds, a new 401(k) offering that provides financial wellness services as a benefit to investors. Smith has testified in front of the SEC, DoL and U.S. Senate on Wall Street conflict of interest issues.