On April 22, 2024, the Department of Labor (DOL) issued new final rules defining who an “investment advice fiduciary” is and regulating the provision of “investment advice.” Historically, the DOL’s rules have only applied to registered investment advisers that provide fee-based services on a regular, mutually agreed-upon basis with investors. In other words, the general scope of application of the previous rules was situations in which both parties expressly agreed that investment advice would be provided, that the advice would generally be personalized to the investor’s particular needs and best interests, and that the adviser’s compensation would be tied to the advice.
In the final rules, the DOL broadened the definition of “investment advice fiduciary” and expanded the definition of “investment advice.”
The new rules change the general standard for determining whether a fiduciary relationship exists and are based on whether the financial institution has made acts or statements indicating that it is acting as a fiduciary or has provided a “recommendation” of a covered investment. The final rules also expand the definition of “retirement investor” to include individuals who deposit into a Health Savings Account (HSA) and plan fiduciaries (employer plan administrators). In addition, investment advice now includes one-time advice on rollovers to an Individual Retirement Account (IRA) or HSA, as is common in retirement plan rollovers.
As a result, under the new rules, many financial institutions that were not previously considered fiduciary may now be considered fiduciary. In addition, certain services that were previously considered non-fiduciary may now be considered fiduciary services.
Of particular note, the new rules do not provide clear criteria for whether a person or entity is a fiduciary. For example, the final rules do not define “recommendation.” However, the preamble to the rules does provide some guidance. Specifically, the preamble provides that whether a recommendation is made depends on the extent to which the communication is individually tailored to the retirement investor. For example, describing a particular list of securities to a particular retirement investor as “suitable for the investor” would be considered a recommendation to acquire the securities, even though no explicit recommendation is made with respect to the specific securities. On the other hand, the preamble to the rule provides that merely providing investment information or education without making investment recommendations does not constitute advice within the meaning of the rule. Clearly, a fine line must be crossed to avoid being deemed a fiduciary.
Being given the title of fiduciary does not mean that it does not come with responsibilities and obligations. Generally, a fiduciary is obligated, sometimes legally, sometimes ethically, to act in the best interests of others. The specific responsibilities and obligations vary depending on various circumstances (such as the nature of the relationship). For example, a fiduciary cannot prioritize his or her own interests over those of the person on whose behalf he or she acts. Although a fiduciary can charge a fee for their services, they must consider factors such as cost and suitability of an investment when making a recommendation. Therefore, for these and various other reasons, many financial institutions do not want to be given the title of fiduciary.
There are several actions that financial institutions can take to avoid being deemed a fiduciary. The key, however, is to establish policies and procedures and actively train staff on them. Staff should be trained on what actions they can and cannot take, and what language and approaches they can and cannot use. Financial institutions should also consider using written statements waiving fiduciary status. Written statements waiving fiduciary status are invalid to the extent they conflict with the financial institution’s other oral or written communications, marketing materials, and applicable state or federal law, but enforcement of the waiver by customers may be valuable. Specifically, a waiver can place the burden on those who claim that the financial institution is a fiduciary to prove that the financial institution took actions that would create fiduciary status.
Conclusion
Financial institutions, with the assistance of their legal counsel, should understand the scope and details of the new DOL fiduciary rules and the potential risks and consequences of being deemed a fiduciary. Key steps financial institutions can take to avoid being deemed a fiduciary include establishing policies and procedures and conducting thorough training for staff. In addition to ensuring that staff are in compliance with the final rules and training, financial institutions should also consider obtaining signed written statements waiving their fiduciary status.
To learn more about IRAs and other tax-advantaged accounts such as Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or the on-demand video training we offer on a variety of topics. Here For more information about available training opportunities, please call 1-800-552-9408.
