As a 401(k) plan sponsor, you are probably aware that there are some new fiduciary regulations going into effect in April 2017. You probably have spent some time wondering (worrying?) whether these regulations affect your relationship with the investment adviser or investment advisor who works with your 401(k) plan. They might. Here’s how to tell.
Investment adviser vs. investment advisor
Generally, investment professionals who refer to themselves as investment advisers rather than investment advisors do so because they consider themselves to be 1940 Act investment advisers. Investment advisers work for registered investment adviser (RIA) firms legally regulated by the Investment Advisers Act of 1940. As a registered investment adviser, we are required to sign on to your plan as a fiduciary. We also meet the three-pronged test outlined in the Act of: 1. Providing investment advice, 2. As a business, and 3. For compensation.
Most brokers use the financial advisor title since they are not registered investment advisers. Some cheat a bit and call themselves financial advisers (there is no law against doing this). Advisors working for brokerage firms, banks and insurance companies are not required to sign on to your 401(k) plan as a fiduciary. In addition, under the new fiduciary regulations, they will be able to take advantage of all of the loopholes (technically referred to as best interest contract exceptions, or BICE exceptions) in the new fiduciary regulations.
What if you hired an investment advisor?
You are going to need to spend some time evaluating your 401(k) advisor relationship if you hired an investment advisor who works for a brokerage firm, bank or insurance company. These advisors will be presenting their clients with a document, which they will ask their clients to sign, outlining their fiduciary obligations and limitations. Those clients who wish to continue working with their existing brokerage firm, bank or insurance company advisor will need to get comfortable with the services and limitations outlined.
It’s important to note that registered investment advisers are already in compliance with the new fiduciary rules. There will be no additional documents their clients need to review and sign with regard to their fiduciary responsibility.
Does it make a difference who you work with?
Remember, the thrust of the new fiduciary regulations is to require that any investment professionals working with your 401(k) plan put your plan’s interests ahead of their own. Registered Investment Advisers have always been required to do this. Advisors working for brokerage firms, banks and insurance companies have not. They have always been and will continue to be answerable to their employers first and their clients second.
As a result, even under the new fiduciary regulations, you are still likely to receive biased investment advice from an employee of a brokerage firm, bank or insurance company (because of the BICE exceptions in the rules). Registered Investment Advisers, on the other hand, will continue to be required to put your interests first and provide objective investment advice.
It’s all about compensation
Another major difference between an investment adviser working for a RIA and an investment advisor working for a brokerage firm, bank or insurance company is how each is paid. Brokerage firm, bank and insurance company advisors accept commissions and soft-dollar payments from mutual fund families. RIAs don’t. It is the commission and soft-dollar revenue streams that can compromise the objectivity of these advisors.
Next steps for plan sponsors
There are many financial advisors who do good work selling insurance products, investment products and financial planning services. You may work with such an advisor right now on your personal investments or financial plan. There continues to be no requirement that advisors who work with individuals on their personal investments assume fiduciary responsibility — the new regulations apply only to retirement accounts.
Talk to your financial adviser/advisor today to learn whether his/her fiduciary relationship with you will be changing. If you currently work with a brokerage firm, bank or insurance company consider, speaking with a registered investment adviser for comparison.
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