Setting expectations with clients post DOL fiduciary regulatory package

As you envision becoming an ERISA fiduciary, I’d encourage you to start thinking about setting expectations with your retirement plan clients sooner rather than later. Why? Well, I’m guessing you and your clients will want to know:

  • How, and to what extent, you’ll provide investment advice
  • How you’ll get paid
  • What changes may be necessary to plan investments and services
  • How your clients will acknowledge and agree to the services

Now, you’ll need direction from your broker-dealer on most of these things before having any conversations with clients, but let’s talk about some basic guidelines. The first of which is establishing your role with your clients going forward.

If you’re like most advisors, you’ve committed yourself to working in your clients’ best interest. And you’ve been doing so as a registered representative of a broker-dealer following FINRA suitability rules or as a fiduciary under federal securities law. But as an ERISA fiduciary, your obligations and responsibilities will be different. Let’s break down the differences as well as possible options, which should help you set expectations with your clients.

Start by understanding the change in your fiduciary obligation

Under FINRA rules, you’re generally required to have a reasonable basis to believe that a recommendation is suitable based on a client’s investment profile. In the retirement plan context, this might include the:

  • Financial sophistication of the employee base
  • General risk tolerance
  • Investment objectives of the plan

In contrast, as an ERISA fiduciary, you must act “in the sole best interest” of your clients. And you must do so with the care, skill and diligence that a prudent person acting in such capacity would use based on the facts and circumstances at the time of the recommendation. Put simply, this is a higher standard! It means you’ll need more information, robust processes and documentation for your recommendations going forward.

Federal securities law requires that securities fiduciaries either eliminate or disclose all conflicts of interest that could impact the impartiality of the advice provided. ERISA fiduciaries are explicitly prohibited from receiving compensation from third parties or compensation that varies based on their recommendations unless they can meet a prohibited transaction exemption.

So, how you broach this topic with your clients depends largely on the fiduciary role your broker-dealer allows you to take and the specific prohibited transaction exemption they will utilize.

Let’s talk about two additional things that may impact how you set expectations with your clients going forward:

  1. Your broker-dealer uses the BICE and allows commissions going forward; or
  2. Your broker-dealer chooses to move to an advisory agreement under a Registered Investment Advisor (RIA)

If your broker-dealer uses the BICE, the disclosures will outline your role

The Best Interest Contract Exemption (BICE) is an agreement between your broker-dealer and your retirement plan client. It requires identification of any potential conflicts of interest, such as third-party compensation, and establishment and disclosure of processes and procedures to mitigate those conflicts. For example, if your broker-dealer allows commission-based compensation, but requires level compensation, the BICE would note the payment from a third party and disclose that those payments do not vary by investment recommendation.

The BICE also allows you and your broker-dealer to define the scope of the fiduciary services you’ll provide. So, as you begin the process of discussing such changes with your clients, the BICE will be critical to establishing what you’ll provide in the way of fiduciary services and how you and your broker-dealer will mitigate any potential conflicts to help ensure your recommendations are in the best interest of the client.

If your broker-dealer moves to a fee-based advisory agreement, it will outline your role

If you already operate under an advisory agreement with your clients, there may be little to no change in the services you provide to your clients. If you don’t now, but your firm will require such an agreement with clients in the future, the advisory agreement will outline your role, the services you provide and the fees for those services.  Just know that some RIAs or broker-dealers may also incorporate elements of the BICE into the advisory agreement. In any case, your advisory agreement can be used to outline your role with your clients going forward. Look for guidance from your RIA or broker-dealer.

Regardless of the path chosen by your RIA or broker-dealer, there will likely be a fair amount of “repapering” of agreements with clients in the near future. Consider using this time to clarify your role and value proposition with your clients.

Stay tuned. I’ll be sharing more information on how you can work with your clients in the post-DOL fiduciary regulatory world. In fact, my next blog focuses on considerations around investment recommendations, specifically related to revenue sharing and share class selection.

For additional tools, resources and information about the DOL fiduciary regulatory package, visit

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