PANC 2013: Staying Out of Trouble

In “Conflicts of Interest and How to Manage Them,” the second of a two-part panel, Campbell told attendees that it is impossible to be “a sort-of fiduciary.” Advisers should ask themselves five questions to determine their status. Is their advice 1) regularly provided? 2) for a fee? 3) individualized? 4) pursuant to a mutual understanding? and/or 5) the primary basis for a retirement plan’s decisionmaking? Such is the provenance of a fiduciary adviser, Campbell said.

Fiduciary status matters because the Employee Retirement Income Security Act (ERISA) requires a business model that is consistent with prohibited transaction rules, said Campbell.

Fiduciary advisers cannot use some common nonfiduciary payment structures and activities, such as variable indirect compensation and principal transactions. The individual retirement account (IRA) rollover is another area of potential fiduciary risk.

The Employee Benefits Security Administration (EBSA), a unit of the Department of Labor (DOL), is a regulatory and enforcement agency that, Campbell noted, closed 3,566 civil investigations last year, and 318 of its criminal investigations led to 117 indictments. Clearly, the agency eyes service providers, and it has stated that major case enforcement is a priority in 2013. (Campbell is also former assistant secretary of labor for EBSA.)

No ERISA attorney gives you a get-out-of-jail-free card, Campbell said, but specific precautions can help an adviser avoid fiduciary and disclosure tripwires. For example, model portfolios, increasingly popular with advisers, present some compliance challenges. When an adviser acts as fiduciary adviser to a plan and its participants, how that adviser is compensated could raise red flags for prohibited transactions. The adviser must avoid any financial incentives when recommending investments, such as could occur if steering plan participants to the adviser’s own model portfolio.

Another example: If among two mutual fund families, one pays the adviser 10 basis points and the other pays 12, the adviser cannot recommend either because of the inherent conflict in variable compensation.

Compliance Sand Traps

IRA rollovers, attracting a lot of regulatory scrutiny, are compliance sand traps. “Are you actively soliciting participants, or passively receiving them when they come to you?” Campbell said. “Does the law require an adviser to say no when a participant seeks out his services?” In this gray area, Campbell cautioned, an adviser is not required to say no, “but how you say yes can be tricky.”

The DOL’s new fiduciary definition, likely to come next year, may impose tighter restrictions on unaffiliated advisers. Terming the IRA marketplace “a Wild West,” Campbell noted that DOL concern about the potential for prohibited transactions may spur the agency to address, in a helpful way, rollover solicitations in the upcoming rule. “There might be a prohibited transaction class exemption,” Campbell said. “Meet these conditions, and you can do a rollover.” The DOL’s outlining of a defined process for performing a rollover could eliminate this gray area.

Advisers’ reducing or leveling fees would do much to reduce conflict, Campbell said, adding that higher fees can be fair. The simple fact of higher fees does not always take into consideration an increased number of services, products and opportunities in the IRA that an adviser offers. “The IRA is a fundamentally different creature,” Campbell said, “and these things aren’t available in the plan, which can justify a fee differential.”

One key issue the DOL looks at is the process that people put in place to mitigate conflict, and the potential for higher fees is an easy target, Campbell said. The danger is that someone can say, “Clearly you were self-dealing, because you got paid more by virtue of using your own solution.”

“I like to point to the Ten Commandments,” Campbell said. “There’s a lot of room to live your life around those Ten Commandments” while still following the rules and staying in compliance.