Sunday, March 5, 2017

"Government Should Not Regulate FA's Conduct by Imposing Fiduciary Duties"

I'm a lawyer, and I'm upset. Because the government has these rules in place. I can't, for example, represent the buyer of a business when the seller of the business interest gives me a commission to assist with its sale. How awful! Why shouldn't I be permitted to profit from such an endeavor?

I'm also the trustee of a private trust, and I'm saddened. Because, again, the government has these darn laws and regulations in place. For example, I can't sell my stamp collection to the trust, for a tidy profit for myself, even though it would be a "good" investment (at least, so I say).

I also provide investment advice. Imagine, again, my total dismay when I was informed by securities regulators that I was a fiduciary. I cannot accept commissions from selling hedge funds, non-publicly traded REITs, oil and gas limited partnerships, and all manner of other kinds of illiquid investments. I can't receive expensive trips and other awards for meeting sales quotas. I can't receive additional compensation through casually disclosed payments for shelf space and other revenue-sharing arrangements. Even though I would receive much more personal compensation as a result.

Imagine, those government regulators even want me to exercise "due care" when providing investment advice! Oh, my, the plaintiff's attorneys are clamoring ... they are parked outside my door, even!

Oh, woe to me. The federal government is so intrusive! In fact, it must be a communist conspiracy, hatched by some liberal academics in some ivory tower in cohorts with evil government bureaucrats.

Of course, I jest.

Yet, over the past few weeks, I have received many communications - from "financial advisers" I have never met - telling me in no uncertain terms that the government has no right to interfere in their business as a financial advisor. They should be free of all government restraint.

Hogwash.

As James Madison so famously wrote, "If men were angels, no government would be necessary."

The fact of the matter is ... fiduciary duties are not imposed lightly, but are imposed when other legal constraints are ineffective - such as disclosures (not read, if read not understood, by consumers, in the complex and ever-changing world of investments).

The fact of the matter is ... fiduciary duties serve to restrain greed.

The fact of the matter is ... some government regulation of business conduct is justified. And the U.S. Department of Labor's Fiduciary ("Conflict of Interest") Rule is perhaps the most necessary, thoughtful, and elegant regulation to emerge in the last few years.

The fact of the matter is ... I truly am an attorney. I do serve as the trustee of a private trust. And I am a registered investment adviser. As such, I accept the restraints on my conduct that come with my fiduciary status. I accept the responsibility to avoid conflicts of interest and to act with a high degree of expertise and care.

Yet, even though I am "burdened" with such fiduciary obligations:
  • I earn reasonable, professional-level compensation for my expertise.
  • I serve clients both large and small.
  • I provide holistic advice to my clients, often changing their lives dramatically for the better.
  • I look forward to going to work each and every day.
  • I look forward to serving my clients as a trusted professional.
  • I know I add value, through my expertise and through my stewardship of my client's hopes and reams.
  • Lastly, I don't ever think about potential liability as a fiduciary. Because by avoiding conflicts of interest, and by maintaining and applying my expertise, I have nothing to fear.
I have been for 30 years an attorney, and I have served for over 15 as an investment adviser, and for nearly a decade as a private trustee. In these roles, I have operated as a fiduciary willingly, and happily.

The fact of the matter, as I've illustrated before here and here, I've seen the harm done to my fellow Americans by non-fiduciaries providing financial and investment advice. Hundreds of times. Perhaps thousands of time. I've lost count.

I've seen Americans' retirement hopes and dreams crushed through investment advice that hides behind the low standard of "suitability." I've seen the huge extraction of rents by Wall Street and the insurance companies from the investment portfolios of my fellow citizens.

I've seen the failures by FINRA to raise the standards of conduct for brokers, as it opposed (and continues to oppose) a bona fide fiduciary standard of conduct.

I have a saying about those who continue to impose harm on investment consumers: "Either they don't know, or they don't care."

And I have a saying about those who continue to oppose the imposition of fiduciary status. They just don't understand the substantial public policy rationale behind the imposition of fiduciary status - whether it be on a trusted attorney, a trustee, or when providing advice about investments.

So, to all those who oppose a "government mandate" that you act as a trusted, expert adviser when providing financial and investment advice, and in the best interests of your clients ... you may prevail in the short term, for now. But political winds change, and the fiduciary movement has its legs.

Every year that goes by bona fide fiduciaries continue to gain market share.

Every year that goes by more and more consumers will ask the right questions to ensure that they are receiving advice only from bona fide fiduciaries.

Every year that goes by the business model of selling expensive, often risky and inappropriate investment and insurance products, will be in ever-greater jeopardy. It's not what Americans want. It's not good for American business. It's not good for capital formation. Your business model is a dinosaur, and only through the money-fueled intensive lobbying by FINRA, SIFMA, FSI has the extinction event, so long overdue, been temporarily delayed.

Join me now, or be forced to join me later. It's your call. But, it's inevitable.

And, just as an aside. Being a fiduciary to your clients just happens to be ... the right thing to do.

Friday, March 3, 2017

Mrs. Baxter's 'Financial Advisor' - A Sad Tale of Deceit and Betrayal

March 3, 2017:

Against the backdrop of the Trump Administration's initiative to delay, and then repeal, the DOL fiduciary rule (designed to eliminate, or at least minimize, conflicts of interest between financial advisors and their clients), we often forget the real harm caused to our fellow Americans under the current regulatory regime. Each and every day individual investors are scammed. They believe they receive trusted advice from expert professionals, when in most cases that is just not so.

The sad reality is that the person sitting across the table from the individual investor is more likely than not just pushing products - expensive mutual funds destined to underperform, even more expensive hedge funds and floating rate securities, fixed (equity) indexed annuities with often-excessive commissions issued by insurance companies with inadequate financial stability, high-cost variable annuities with illusory "guarantees," and much more.

Most individual investors think they are doing fine with their current "advisor" - when in reality they are subjected to what I call "financial rape." It's a continuous battle to open up the eyes of individual Americans, and then to guide them on how to choose a trusted, bona fide fiduciary.

In this post, I relate the story of "Mrs. Baxter." Not her real name, of course, nor even representative of a single client. But, this tale is, rather, a compilation of hundreds of individual investors I have counseled over the years. Indeed, there are millions of "Mr. Baxters" and "Mrs. Baxters" out there  who are unaware of the harm which is imposed upon them. And, as seen in this post, they need help - from true professionals who operate at all times as "bona fide fiduciaries."

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"Mrs. Baxter, the total fees and costs charged in connection with your investment portfolio are well over 2% a year, and approaching 3% a year," I opined.

The 63-year old Mrs. Baxter, a recent widow, seemed un-phased. "They must be great investments, then," she replied.

"No, ma'am," I replied, "the extra fees and costs you are being charged are reducing the returns of your portfolio, over time. In fact, even though you are withdrawing only three and a half percent of your portfolio, each year, with the excessive fees and costs you are paying your portfolio is unlikely to grow further. And, most importantly, you'll likely run out of money during your lifetime."

Mrs. Baxter sat up in her chair. "But my financial advisor said I would be fine."

"Do you know how much his firm is paid, from your investment portfolio," I inquired.

Mrs. Baxter appeared puzzled. "I'm not paying my financial advisor anything. He's never charged me a dime."

"Sadly, ma'am, that's not the case. Between the sales loads, or commissions, you've incurred, as well as the 12b-1 fees charged by many of the mutual funds you own and paid to your brokerage firm, the  extra payments made by your mutual funds and variable annuities to your brokerage firm called "payment for shelf space" and "marketing support dollars," soft dollars, and more, your brokerage firm is receiving about 2% a year in fees."

Mrs. Baxter replied, "That can't be."

I took several minutes to review the printout of my spreadsheet with her. Like about one-third of individual investors, Mrs. Baxter thought her broker didn't charge any fees at all. And, like about 80% to 90% of individual investors, Mrs. Baxter had no clue about her total fees and costs.

It was surprising that Mrs. Baxter was in my office now. If her daughter had not insisted that she get a second opinion on her portfolio, she likely would have never learned what she is learning now.

I continued. "Mrs. Baxter, on your $1,000,000 portfolio, the total fees and costs you are paying are about $26,000 a year. You are paying more than twice in fees and costs that you should. And, your investment portfolio is also not designed or managed in a way to minimize the tax drag on your investment returns. In essence, you are paying several thousand dollars a year, each year, in taxes you should not have to pay."

"In sum," I continued, given the seven years you've been with your financial advisor, the value of your portfolio is far less than it should be. It should be worth at least 10% more, and quite probably an even higher amount. The academic evidence is compelling: high fees and costs, and excessive taxes, drag down your investment returns substantially, and the effects of compounding increases the severity of the harm to you over time."

I had yet to deliver all of the bad news. "Mrs. Baxter, also, your portfolio is exposed to too much risk. There are ways to design portfolios that minimize different types of risk. But this portfolio does none of that. To put it bluntly, this portfolio is not designed by an expert, and it puts your financial future in serious jeopardy."

Mrs. Baxter, her eyes now wide open, had a good question for me: "The sign in my financial advisor's conference room said, 'The Best Interests of Our Customers Should Come First.' Did my financial advisor break his vow to me - to act in my best interests?"

"Unfortunately, Mrs. Baxter, that sign did not clearly state that your financial advisor, and his firm, are required to act in your best interests. It is marketing hype, and it is, unfortunately, quite deceiving. The firm is not a fiduciary to you. Your financial advisor is a product salesperson, not a trusted advisor."

Mrs. Baxter appear confused, as I continued. "I've checked on your 'financial advisor.' He's just a stockbroker, who has been in the business for several years. He also sells expensive insurance and annuities. Yet there is no evidence that he possesses any substantial training in planning to address retirement needs, in taxation, or in portfolio theory and management. While he has a few designations after his name, most are meaningless. In fact, there is no evidence that he possesses the substantial knowledge and expertise that a true professional should possess to advise you on your investment portfolio and retirement planning."

"But he calls himself a 'financial advisor'!" Mrs. Baxter said now. It was clear that she was getting emotional. Her anger was apparent. And her expression changed from time to time to one of concern - as she should be concerned about the real threat to her own financial future. She asked, "Can I sue him?"

"Sadly, I don't see how a lawsuit would be successful," I replied. "All of your account documents stated that the advisor was not a fiduciary to you. Your broker appeared to recommend 'suitable' investments, but he had no duty to recommend the best investments to you. In fact, many of the recommendations made appear to have been done because they paid your broker, or his firm, more money."

Mrs. Baxter just sat there. Stunned. I knew she never read the mountains of disclosure documents she was presented. Even if she did read them, like so many Americans she does not possess the high degree of financial knowledge necessary to discern what was important, and what was not.

"Mrs. Baxter, here's what I want you to do. Take my written analysis home. Look over it. If you desire, seek out another second opinion."

Mrs. Baxter said, "I've already decided. I'm going to make a change. I want you to take over my portfolio."

I knew it was not time for her to make any important decisions, especially regarding her own future retirement security. Certainly no one should make decisions about money in such an emotional state. So I replied, "Mrs. Baxter, let's meet again in a week. And we will go over the analysis, make certain you understand it, go over my own portfolio recommendations for you. Write down your questions over the course of the net week, and I'll answer all them when we meet."

"But I don't have any questions."

"Mrs. Baxter, I can assure you that a week from now you will have questions. Good ones, too. But for right now, and for several days, it is in your best interests to let what I've told you sink in. You should review this analysis. Then we'll review it again, together. And then, and only then, will we proceed together to fix your portfolio and make it work a lot better for you - with far less fees and costs, substantially reduced taxes imposed on you, and with far less risk that you will outlive your money."

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If you are an individual investor, and you've read this, what can you do?

  • First, ask your current "financial advisor" (or whatever title he or she uses) these questions. Get the answers to these questions, in writing. Be aware that many investment or financial advisors say that they are "fiduciaries" or that they act "in your best interests," when in fact they do not. This questionnaire should result in "yes" answers to each and every question; otherwise, your advisor may not be a bona fide fiduciary (in the author's view).
  • Second, get a second opinion about the management of your investment portfolio. Ask the same questions, first, of those you approach for a second opinion. And get the answers in writing. If all of the answers are not "yes" - keep looking. Find a true expert, trusted advisor. Find what I call a "bona fide fiduciary." They are out there, and when you find them your own financial future will become much more secure as a result. 
  • Third, and in addition to the answers to the questions referred to above, have your advisor provide you with a certification of his or her (or the firm's) allegiance to bona fide fiduciary practices. The three documents currently available that meet this requirement are:
    1. The Fiduciary Oath from The Committee for the Fiduciary Standard (any advisor can sign this oath; no cost involved, nor membership required);
    2. The Fiduciary Oath from the National Association of Personal Financial Advisors (NAPFA) (members of NAPFA, who are fee-only and who meet certain educational and testing and review requirements, sign this oath); or
    3. The Best Practices Fiduciary Advisor Affirmation from the Institute for the Fiduciary Standard (the Advisor Affirmation Program requires firms to pay an annual fee, have their Form ADV reviewed, and require language inserted into their Form ADV).
Realize that your financial goals, hopes and dreams are too important to risk to chance. Seek out the best. There are bona fide fiduciaries out there - expert, trusted professionals. But they remain outnumbered by non-professionals in this business by about 10-to-1. So be prepared to search diligently, and don't ever accept anything less than a true, bona fide fiduciary.

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If you are an existing financial advisor who is not currently acting as a trusted professional, you are likely tired of pushing proprietary products, or products that pay your firm "payment for shelf space" or other forms of revenue sharing. You likely want to act in your client's best interests, at all times and without exception; but your firm just is not structured to permit you to do this. You want to deserve the trust that your clients place in you. What should you do?

  • First, realize that for several decades now a growing body of independent, fee-only advisors has existed. These fee-only advisors avoid nearly all conflicts of interest. They don't accept material third-party compensation (commissions, 12b-1 fees, payment for shelf space, revenue sharing, sponsorship of client seminars, prizes, awards, etc.). And - they make an excellent living. More importantly, they love what they do - they look forward to going to work each and every morning, for they know that each and every day they transform the lives of their clients for the better.
  • Second, attend a conference of fee-only financial advisors. There are many worthwhile fee-only organizations out there, but the largest and most established is the National Association of Personal Financial Advisors (NAPFA). At their Fall or Spring conference you'll find sessions on practice management, portfolio design and management, how to identify and use the best technology, and much more. More importantly, you will meet other advisors who previously fled the world of product sales for the world of trusted advisors. They and everyone else at the conference will greet you warmly. You'll receive advice from everyone who has gone before you, and you'll be invited to join this collegial community of professionals. You'll go away from the conference knowing that a pathway to excellence exists, and you will more firmly visualize the route you must take toward a more personally rewarding career.
  • Third, if you are considering joining another firm, there are many opportunities out there. If you possess established client relationships (please, don't call it a "book" any more!), there may be firms - both large and small - that you can join. These firms already operate as bona fide fiduciaries. Many of these firms have assisted "breakaways" before. So, explore your options, quietly and discretely. You'll be glad you did!
  • Fourth, if you are already with a broker-dealer firm and/or insurance company, then before you begin the actual planning for any transition to "go independent"- get legal advice. You have rights, and so do your clients. To avoid missteps, and to better the odds that your clients will follow you, seek out legal advice from securities law and/or compliance attorneys who have previously advised on many advisor transitions. Don't skimp on good legal advice as you plan to make the transition. 
  • Fifth, realize that once you make the decision to transition to an independent firm (existing, or your own firm), and to practice as a bona fide fiduciary, you'll never want to go back! In fact, very, very few of those who leave the "sell side" of this industry for the "buy side" ("purchaser's representative" or "fiduciary") ever return. (In fact, in all my years, I've never, ever, met even one who left the sell-side and then returned to it later!) So, be confident that you've made the right decision!
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If you are an existing financial professional who already operates as a bona fide fiduciarycongratulations! Like me, you likely love your profession, and your career path.

And, you are likely upset about the developments in Washington, D.C. While you see that the Trump Administration's decision to kill off the DOL fiduciary rule favors your own practice (as you will retain a marketing advantage as a true fiduciary), you also recognize the harm that is done to your fellow Americans, each and every day. You know that fiduciaries will prevail in the marketplace over time, but you are saddened that it will take longer for financial planning and investment advice to shed the "product sales culture."

  • First, don't give up. Although there is only a small chance to get the Trump Administration to reverse its course, this is a fight that continues to be worth fighting! Submit a comment letter on the DOL's proposals to delay the fiduciary rule. (Do so today!) Ask your colleagues to submit comment letters. And ask your clients, as well. Share, to the extent you can, stories of the "Mrs. Baxters" of this world - with the DOL, with your U.S. Senators and members of the U.S. Congress, and with your local media.
  • Second, realize that even if the DOL fiduciary rule is delayed and then either rescinded or replaced (with a weak rule), much progress has been made in recent years. Several courts have already upheld the DOL fiduciary rule on its merits. Hence, all it takes is a future change of the Administration, and before long a new version of the DOL fiduciary rule - likely even improved and stronger - will emerge again and be adopted and finalized. It's inevitable. So, have hope that a better day will come - for all Americans, not just the ones lucky enough to have you as their investment and financial advisor.
Ron A. Rhoades, JD, CFP(r) is the Director of the Financial Planning Program at Western Kentucky University's Gordon Ford College of Business, Bowling Green, Kentucky. Dr. Rhoades teaches courses in investments, retirement planning, estate planning, and managerial finance.

Ron is an avid researcher into fiduciary law as applied to financial services, and has written and spoken extensively about the fiduciary duties of financial advisors, the status of laws and regulations, investment due diligence, and the paths toward a true profession.

This post reflects his views only, and are not those of any institution, organization or group with whom he may be associated. To reach Ron, please e-mail: ron.rhoades@wku.edu. Thank you.

Saturday, February 25, 2017

IRA Rollovers: Does Your Due Diligence Meet Regulatory Requirements?

IRA ROLLOVER DATA GATHERING AND DUE DILIGENCE
UNDER THE U.S. DEPARTMENT OF LABOR’S
BEST INTERESTS CONTRACT EXEMPTION (BICE)
By Ron A. Rhoades, JD, CFP®[1]
Feb. 2017

Since the April 2016 announcement of the U.S. Department of Labor’s (DOL’s) Final Rule, “Conflicts of Interest” and the associated Best Interest Contract Exemption rule, increased attention has been focused on ensuring that rollovers to an individual IRA, from another IRA or from a qualified retirement plan (QRP), is in the client’s best interests. In addition to the requirements imposed by the DOL, both the U.S. Securities and Exchange Commission (SEC) and various state securities regulatory authorities have increased their scrutiny on IRA rollovers, where a fiduciary duty to the client (or prospective client) is present. Hence, regardless of whether the DOL's "Conflict of Interest" and related rules are delayed (as I anticipate) and later rescinded or substantially modified, firms should put in place procedures for IRA rollover due diligence determinations.
This memorandum suggests a process for information data gathering for a QRP-to-IRA rollover, or an IRA-to-IRA rollover, under the DOL’s Best Interest Contract Exemption ("B.I.C.E.") (effective April 10, 2017, unless delayed as expected). This analysis incorporates requirements imposed by other sources of law. The suggested process could be adapted to other regulatory regimes, although the requirements imposed upon financial advisors under other regulatory regimes are usually less strict than those applied under B.I.C.E.
A suggested 9-step process is then set forth for the development of the required due diligence analysis, including possible ways to document the “value add” of the investment adviser in order to justify the adviser’s reasonable fees.
A. DOL’s IRA Rollover Requirements, Generally
When an adviser recommends[2] to an investor that the investor roll over a qualified retirement plan or a separate IRA into a new IRA account for which the adviser (or her or his firm) will receive compensation, the U.S. Department of Labor’s “streamlined exemption” requirements under its Best Interests Contract Exemption include:
1.     Provide the client with a written statement of the firm’s and the adviser’s status as a fiduciary;
2.     Comply with the Impartial Conduct Standards, which include:
a.      The duty of loyalty (i.e., to act in the investor’s best interests);
b.      The fiduciary duty of due care, augmented by the application of the Prudent Investor Rule;
c.      The duty to not charge more than “reasonable compensation”; and
d.     The duty to avoid making statements that would be misleading at the time they are made; and
3.     Undertake an analysis to ensure that the IRA rollover is in the investor’s best interests, and document that analysis.[3]
  1. The DOL’s Written Statement Requirement.
The requirement of providing a written statement of the firm’s and the adviser’s status as a fiduciary is easily adhered to. The written statement is not required to be on a separate form. However, firms should take care to not “hide” the statement of fiduciary status in long disclosures. Accordingly, I suggest that the statement be found in either a letter to the client or in an Investment Policy Statement or in any analysis presented to the client, or other proposal, in which the rollover into an IRA is suggested. Firms should likely document the receipt by the client of such written statement; hence, a separate written acknowledgement form may be utilized (perhaps in conjunction with a prospective client’s receipt of a firm’s Form ADV Part 2A/2B, privacy policy, and/or other documents).
While no specific language of the disclosure is required, I suggest the following:
Under U.S. Department of Labor regulations, (Name of Firm) and its (Financial Advisers, or other title) are fiduciaries (as that term is defined in the DOL regulations) to you under ERISA and/or under the Internal Revenue Code with respect to our recommendation to either rollover or not rollover your qualified retirement plan or IRA account into an IRA account to be advised upon by our firm, and with respect to any investment advice provided.
As of the date of this memorandum, it appears that the DOL does not require level fee fiduciaries to continue to be bound by the Impartial Conduct Standards following the IRA rollover. This is important, as level fee fiduciaries would not be bound following the IRA rollover by the strict dictates of the prudent investor rule. Hence, unless the DOL changes its prior interpretation, level fee fiduciaries could add to the last sentence:
 “prior to or at the time of such rollover”
Should you desire to further acknowledge your status as fiduciaries, and provide an explanation to the client of your fiduciary obligations (as is often found in firm’s Form ADV, Part 2A), then the following is additional suggested language that might be included with the disclosure language set forth:
This means that we are required to act in your best interests and with due care. Further information regarding our fiduciary obligations to you can be found in our SEC disclosure document (“Form ADV Part 2A”), which is or has been provided to you.
  1. The Impact of the Application of the DOL’s Impartial Conduct Standards, Generally.
The requirements of the Impartial Conduct Standards are discussed in my separate memorandum, dated Nov. 3, 2016, titled: “The Key Requirements of the DOL Fiduciary Rules for ‘Level Fee Advisers.’”
Generally, these requirements incorporate the general fiduciary duties of due care (augmented by the prudent investor rule’s strict requirements), loyalty (i.e., act in the best interests of the client), and utmost good faith (candor, avoidance of misleading statements). I urge advisers to thoroughly acquaint themselves with the requirements of the Impartial Conduct Standards, including the requirements of the prudent investor rule when the Impartial Conduct Standards are to be applied.
It should be noted that under the DOL final regulations, the fiduciary duties of advisers are generally not waivable by the client, nor can such duties be disclaimed by the adviser. While reasonable limits can be imposed upon the scope of an engagement (for example, as to the duration of the time during which advice shall be provided), the core fiduciary duties of due care and loyalty cannot be negated. This is a departure from the SEC’s general practice in recent years, which has been to permit waivers and disclaimers provided adequate disclosures are undertaken. The DOL’s position on the non-use of waivers and disclaimers is more in accord with state common law for fiduciary relationships of this type; under general fiduciary law the legal techniques of waiver and estoppel are constrained in fiduciary-entrustor relationships in which there is a great disparity in either power or knowledge.
  1. DOL Data Gathering and Documentation Requirements.
Under BICE, the core data gathering requirements relate to the requirement to state, in an internal memorandum to be maintained for six years by the firm, for each IRA rollover, “the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor.”
For Qualified Plan to IRA Rollovers. As set forth in BICE the primary documentation requirements include contrasting between the investor’s current situation (i.e., maintaining the funds in the current qualified plan governed by ERISA) and the proposed rollover, and explicitly include the following:
(1)           the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor;
(2)                   the alternatives to undertaking the rollover;
(3)                   the fees and expenses associated with each option;
(4)                   whether the employer pays for some or all of the plan’s administrative expenses; and
(5)                   the different levels of services and investments available under each option.
The DOL, in the first set of FAQs (dated Oct. 27, 2016) regarding its Conflict of Interest and related rules, addressed in part the challenges of gathering data from qualified plan accounts:
Q14. Can an adviser and financial institution rely on the level fee provisions of the BIC Exemption for investment advice to roll over from an existing plan to an IRA if the adviser does not have reliable information about the existing plan’s expenses and features?
As described in Q13, in the case of investment advice to roll over assets from an ERISA plan to an IRA, the streamlined level fee provisions of the BIC Exemption require advisers and financial institutions to document the reasons why the advice was considered to be in the best interest of the retirement investor. The documentation must take into account the fees and expenses associated with both the existing plan and the IRA; whether the employer pays for some or all of the existing plan’s administrative expenses; and the different levels of services and investments available under each option.
To satisfy this requirement, the adviser and financial institution must make diligent and prudent efforts to obtain information on the existing plan. In general, such information should be readily available as a result of DOL regulations mandating plan disclosure of salient information to the plan’s participants (see 29 CFR 2550.404a-5). If, despite prudent efforts, the financial institution is unable to obtain the necessary information or if the investor is unwilling to provide the information, even after fair disclosure of its significance, the financial institution could rely on alternative data sources, such as the most recent Form 5500 or reliable benchmarks on typical fees and expenses for the type and size of plan at issue. If the financial institution relies on such alternative data, it should explain the data’s limitations and the written documentation should also include an explanation of how the financial institution determined that the benchmark or other data were reasonable.
Although the documentation requirement is only specifically recited in the level fee provisions of the BIC Exemption, the documented factors and considerations are integral to a prudent analysis of whether a rollover is appropriate. Accordingly, any fiduciary seeking to meet the best interest standard as set out in the exemption would engage in a prudent analysis of these factors and considerations before recommending that an investor roll over plan assets to an IRA or other investment, regardless of whether the fiduciary was a “level fee” fiduciary or a fiduciary complying with the full BIC Exemption.
For IRA to IRA rollovers, or for any switch from commission-based account to a level-fee account. The explicit documentation requirements in BICE are more limited, and include:
(1)           reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor; and
(2)                             the services that will be provided for the fee.
As seen above, a greater level of detail is required for qualified plan to IRA rollovers. However, to determine if an IRA-to-IRA rollover is in the “best interest” of the investor logically requires a similar comparative analysis. However, the comparative analysis might only extend to how the current IRA of the investor is invested (versus a consideration of all of the alternatives to the rollover), in contrast to how the IRA will be invested by the firm/adviser following the rollover.
  1. Requirements Imposed By on IRA Rollovers by Other Laws and Regulations.
As stated above, the DOL regulations impose explicit data-gathering and analysis requirements for IRA rollovers, along with a high standard of due care that encompasses the prudent investor rule. Yet, other existing laws and regulations impose requirements upon fiduciaries undertaking an IRA rollover, and these sources of law can be viewed with an eye to informing the adviser as to the scope of its, her, or his obligations in connection with IRA rollovers.
1.     DOL AO 2005-23A and ERISA’s Duty of Prudence. Previously the DOL issued Advisory Opinion 2005-23A. This opinion concluded that “a financial planner or investment manager or adviser, who is selected by a participant to manage the participant's investments would be liable for imprudent investment decisions because those decisions would not have been the direct and necessary result of the participant's exercise of control, even though the participant selected the person to manage the assets in his or her individual account.”[4]
The Advisory Opinion also stated that “someone who is already a plan fiduciary responds to participant questions concerning the advisability of taking a distribution or the investment of amounts withdrawn from the plan, that fiduciary is exercising discretionary authority respecting management of the plan and must act prudently and solely in the interest of the participant. Moreover, if, for example, a fiduciary exercises control over plan assets to cause the participant to take a distribution and then to invest the proceeds in an IRA account managed by the fiduciary, the fiduciary may be using plan assets in his or her own interest, in violation of ERISA section 406(b)(1).”[5]
ERISA’s duty of prudence requires that a fiduciary discharge his duties “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”[6]
2.     FINRA Regulatory Notice 13-45. FINRA’s Regulatory Notice 13-45 provides that a recommendation that an investor roll over retirement plan assets to an IRA typically involves securities recommendations subject to FINRA rules. A firm’s marketing of its IRA services also is subject to FINRA rules. Any recommendation to sell, purchase or hold securities must be suitable for the customer and the information that investors receive must be fair, balanced and not misleading.”[7] FINRA goes on to state: “A recommendation to roll over plan assets to an IRA rather than keeping assets in a previous employer’s plan or rolling over to a new employer’s plan should reflect consideration of various factors, the importance of which will depend on an investor’s individual needs and circumstances.”[8] Noting that its list is not “exhaustive” and that other considerations may exist in specific circumstances, FINRA then sets forth the following specific factors that should be considered in connection with the rollover:
a.      Investment Options—An IRA often enables an investor to select from a broader range of investment options than a plan. The importance of this factor will depend in part on how satisfied the investor is with the options available under the plan under consideration. For example, an investor who is satisfied by the low-cost institutional funds available in some plans may not regard an IRA’s broader array of investments as an important factor.
b.      Fees and Expenses—Both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are invested and investment advisory fees. Plan fees typically include plan administrative fees (e.g., recordkeeping, compliance, trustee fees) and fees for services such as access to a customer service representative. In some cases, employers pay for some or all of the plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account set-up and custodial fees.
c.      Services—An investor may wish to consider the different levels of service available under each option. Some plans, for example, provide access to investment advice, planning tools, telephone help lines, educational materials and workshops.
d.     Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning and access to securities execution online.
e.      Penalty-Free Withdrawals—If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.
f.       Protection from Creditors and Legal Judgments—Generally speaking, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of IRA assets in lawsuits.
g.      Required Minimum Distributions—Once an individual reaches age 70½, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 70½, however, he generally is not required to make required minimum distributions from his current employer’s plan. This may be advantageous for those who plan to work into their 70s.
h.     Employer Stock—An investor who holds significantly appreciated employer stock in a plan should consider the negative tax consequences of rolling the stock to an IRA. If employer stock is transferred in-kind to an IRA, stock appreciation will be taxed as ordinary income upon distribution. The tax advantages of retaining employer stock in a non-qualified account should be balanced with the possibility that the investor may be excessively concentrated in employer stock. It can be risky to have too much employer stock in one’s retirement account; for some investors, it may be advisable to liquidate the holdings and roll over the value to an IRA, even if it means losing long-term capital gains treatment on the stock’s appreciation.
3.     State Common Law; Procedural vs. Substantive Due Care; Waivers of the Duty of Due Care. Outside of the realm of ERISA, the Investment Advisers Act of 1940 does not contain a private right of action. Hence, fiduciary breach causes of action against investment advisers are based upon state common law (i.e., the law derived from reported cases). While, due to arbitration, a large number of reported court decisions do not exist under which the boundaries of the common law duties of due care of a financial or investment adviser have been determined, some general principles can be derived from similar fiduciary-entrustor relationships in which either fiduciary investment decisions are made (such as trustee-beneficiary relationships) or professional advice is provided (such as attorney-cleint relationships).
a.      General Duty of Due Care. Due care requires a member to discharge professional responsibilities with competence and diligence.  It imposes the obligation to perform professional services to the best of an investment adviser’s ability with concern for the best interest of those for whom the services are performed. The duty of due care is that of the prudent expert (i.e., prudent financial or investment adviser), not that of the common man.
b.      Procedural vs. Substantive Due Care, Generally. The duty of due care has been considered to involve both process and substance.  That is, in reviewing the conduct of an investment adviser in adherence to the investment adviser’s fiduciary duty of due care, a court would likely review whether the decision made by the investment adviser was informed (procedural due care) as well as the substance of the transaction or advice given (substantive due care).  Procedural due care is often met through the application of an appropriate decision-making process, and judged under the standard, not (necessarily) by the end result.  Substantive due care pertains to the standard of care and the standard of culpability for the imposition of liability for a breach of the duty of care. 
c.      Substantive Due Care. The duty of due care is measured by the ordinary negligence standard. However, the standard of prudence is relational, and it follows that the standard of care for investment advisers is the standard of a prudent investment adviser. By way of explanation, the standard of care for professionals is that of prudent professionals; for amateurs, it is the standard of prudent amateurs. For example, Restatement of Trusts 2d § 174 (1959) provides: "The trustee is under a duty to the beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would exercise in dealing with his own property; and if the trustee has or procures his appointment as trustee by representing that he has greater skill than that of a man of ordinary prudence, he is under a duty to exercise such skill." Case law strongly supports the concept of the higher standard of care for the trustee representing itself to be expert or professional,[9] and in this author’s view similar principles are likely to be applied to fiduciaries under state common law.
d.     Procedural Due Care.  One must evaluate the duty of care, unlike the duty of loyalty, by the process the fiduciary undertakes in performing his functions and not the outcome achieved. The very word “care” connotes a process. One associates caring with a condition, state of mind, manner of mental attention, a feeling, regard, or liking for something. How else may one determine whether an investment adviser who regularly achieves below average returns, or an attorney who loses most cases, has performed his duty of care? It is only through evaluating the steps the fiduciary took while doing his job, and not whether they resulted in success, that one may judge whether the fiduciary has breached his duty.
                                                        i.     Due to the difficulty of evaluating the behavior of fiduciaries, most often courts turn to an analysis not of the advice that was given but rather to the process by which the advice was derived.
                                                       ii.     Nevertheless, while adherence to a proper process is also necessary, at each step along the process the Investment adviser is required to act prudently with the care of the prudent investment adviser. In other words, the investment adviser must at all times exercise good judgment, applying his or her education, skills, and expertise to the financial planning issue before the investment adviser. Simply following a prudent process is not enough if prudent good judgment (and the investment adviser’s requisite knowledge, expertise and experience) is not applied as well.
                                                     iii.     For example, various criteria could be established for the evaluation of mutual funds and exchange-traded funds. Following the established criteria in contrasting and comparing the benefits of an IRA rollover would be appropriate, but only if the criteria utilized are valid. For example, criteria utilized in the selection of pooled investments should be based upon either fund characteristics that academic research supports as valid for decision-making, or they should be derived from criteria produced as a result of the application of common sense.
e.      “Good Faith” Alone is Insufficient. Prudence is measured by objective, not subjective, standards; hence, the “good faith” of the fiduciary is not pertinent to the determination as to whether due care has been exercised. “Prudence is thus measured according to the objective ‘prudent person’ standard developed in the common law of trusts.”[10] Subjective good-faith simply does not come into play.[11] “[T]he prudent man standard is an objective standard, and good faith is not a defense to a claim of imprudence.”[12]
f.       Hindsight is Not to be Applied. Note, however, that the courts recognize that it is simply not possible for a fiduciary to be aware of every piece of relevant information before making a decision on behalf of the principal, and a fiduciary cannot guarantee that a correct judgment will be made in all cases. Moreover, “[t]he ultimate outcome of an investment is not proof that a fiduciary acted imprudently.”[13] “[T]he appropriateness of an investment is to be determined from the perspective of the time the investment was made, not from hindsight.”[14]
g.      Determining the Scope of the Relationship, in the IRA Rollover Context: Can the Scope of Due Care Be Limited? The fiduciary duty of due care of a fiduciary adviser is commensurate with the scope of the relationship. Where the relationship involves the provision of advice relative to an IRA rollover, given the large number of considerations that exist (see discussions, above and below) the duty of due care is also quite broad.
The IRA rollover analysis requires a significant gathering of information about the client and the source and destination account characteristics and investment options, as well as the application of expertise, judgment, and effort by the fiduciary adviser.
Whether the scope of the relationship can be narrowed, such as by disclaiming the necessity of providing tax advice in connection with an IRA rollover, or only considering a limited number of facts in the IRA rollover (when such facts are readily available), is dependent upon state common law’s views of the limited roles of waivers and estoppel in most fiduciary relationships in which a great deal of disparity in either power or knowledge exists.
As seen in the discussion that follows, disclaimers of core fiduciary duties of due care are disfavored, as are waivers by clients of the core fiduciary duty of due care, under state common law. While some specific narrowing of the scope of the fiduciary obligation of due care may be undertaken, such as by confining the scope of the fiduciary obligation to a specific time period or event for which advice is to be given, a broad waiver of the core fiduciary duty of due care is not possible.
                                                        i.     Why Waivers of the Fiduciary Duty of Due Care Are Not Generally Permitted: A Case Study. As evidence of the tremendous difficulty consumers of financial services possess in understanding financial planning concepts, and the difficulty in making good decisions even when handed knowledge of investment products, even Wharton MBA and Harvard students were unable to choose the best S&P 500 Index fund.[15] As this study confirmed, and as every seasoned financial planner is also aware, the vast majority of consumers of financial planning services lack the knowledge to undertake sound financial and investment decisions.
                                                       ii.     When Bargaining On Issues Related To Waiver, Consumers Must Fend For Themselves; Specific Procedures Must Be Followed. “While bargaining with their fiduciaries on the issue of waiver, entrustors must fend for themselves as independent parties. Their right to rely on their fiduciaries must be eliminated. In fact, during the bargaining, the entire relationship must be terminated. Fiduciary law allows such termination of the relationship with respect to specified transactions only if the parties follow a specific procedure … In order to transform the fiduciary mode into a contract mode, four conditions must be met: (1) entrustors must receive notice of the proposed change in the mode of the relationship; (2) entrustors must receive full information about the proposed bargain; (3) the entrustors' consent should be clear and the bargain specific; (4) the proposed bargain must be fair and reasonable. Thereafter, two other general bargaining conditions apply. One relates to consenting parties: entrustors must be capable of independent will. The other relates to the subject matter of the bargain: the proposed bargain must not cover non-waivable duties.”[16]
                                                     iii.     Any Attempt at Waiver Must Be Accompanied by Information Necessary for the Client’s Informed Decision. “Fiduciaries must provide entrustors material information necessary for the entrustors to make an informed decision regarding the waiver. This is necessary because, in contrast to contract law, there is no assumption in fiduciary law that the parties' information about the proposed waiver or bargain is symmetrical. Asymmetrical information among the parties to a fiduciary relationship results both from the nature and from the purpose of the relationship. Fiduciaries possess far more information about their own activities ….”[17]
                                                      iv.     Lacking Adequate Consideration, The Validity of Informed Consent Is Highly Suspect, Especially With Respect to Broad Waivers of Rights. “Because the bargain or waiver is more likely to be in the fiduciaries' interests, but less likely to be in the entrustors' interests, the consent, by entrustor's action or inaction, must be clear. [The] [f]iduciary dut[y] of … care [is a] broad standard rule … in many cases, a broad waiver of duties is bound to be uninformed and speculative. Waivers of specific claims or level of losses will be more readily upheld … A broad waiver of the underlying duties of the [fiduciary] might not be enforced.”[18]
                                                       v.     Substantive Fairness Must Exist for a Waiver to be Valid. “Even if above requirements are met, courts will generally not enforce an unfair or unreasonable bargain, but will require a showing that the transaction is fair and reasonable …  A second reason for doubting the voluntariness of an apparent consent to an unfair transaction could be a lingering suspicion that generally, when entrustors consent to waive fiduciary duties (especially if they do not receive value in return) the transformation to a contract mode from a fiduciary mode was not fully achieved. Entrustors, like all people, are not always quick to recognize role changes, and they may continue to rely on their fiduciaries, even if warned not to do so. Lack of fairness may also signal the absence of more or less equal bargaining power by the entrustor….”[19]
4.     The Duty of Due Care Under the Investment Advisers Act, as Applied by the SEC. Generally, the Advisers Act incorporates the state common law duties of loyalty, due care, and utmost good faith.[20] However, in Santa Fe Industries, Inc. v. Green, the U.S. Supreme Court stated that although the SEC vs. Capital Gains Research Bureau case involved a statute, the Advisers Act’s reference to fraud and the principle of equity implies that Congress intended to establish “federal fiduciary standards.”[21]
In connection with an investment adviser’s duty of due care, the SEC has provided the following guidance:
a.      “An adviser must have a reasonable, independent basis for its recommendations.”[22]
b.      “Investment advisers owe their clients the duty to provide only suitable investment advice. To fulfill the obligation, an adviser must make a reasonable determination that the investment advice provided is suitable for the client based on the client’s financial situation and investment objectives.”[23]
                                                        i.     The SEC has also opined, in applying the doctrine of suitability, that “[o]btaining a customer’s consent to an unsuitable transaction does not relieve a broker-dealer of his obligation to make only suitable recommendations under the SRO rules.”[24] The federal fiduciary duty of due care arising under the Advisers Act would mostly likely be interpreted by the SEC in the same fashion, in that the suitability obligation, at a minimum, would not be subject to waiver by the client of a fiduciary investment adviser.
c.      “The investment adviser must disclose its investment process to clients. For example, Item 8 of Form ADV Part 2A requires an investment adviser to describe its methods of analysis and investment strategies, among other things. This item also requires that an adviser explain the material risks involved for each significant investment strategy or method of analysis it uses and particular type of security it recommends, with more detail if those risks are significant or unusual.”[25]
d.     As a fiduciary, an investment adviser has “a duty of care requiring it to make a reasonable investigation to determine that it is not basing its recommendations on materially inaccurate or incomplete information.”[26]
e.      The Advisers Act “does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments.”[27]
These expressions by the SEC of the Advisers Act’s duty of due care should not be interpreted as the boundaries of the duty of due care. Future SEC regulations, guidance, or examination findings may provide further insight into the specific duties investment advisers face in connection with IRA rollovers, when applying the Advisers Act.
Additionally, it should be noted that the SEC has in recent decades permitted investment advisory firms to disclaim away, and/or have clients waive, some of the fiduciary duties that may otherwise exist. Whether this interpretation of the Advisers Act continues indefinitely into the future is uncertain, especially given the SEC’s increased focus on the retirement accounts of individual investors and the ever-changing composition of the Commission itself.
5.     Current SEC Exam Priorities: Retirement Accounts. In June 2015, the SEC’s Office of Compliance, Inspections and Examinations (OCIE)] launched a multi-year examination initiative, “ReTIRE,” focusing on SEC-registered investment advisers and broker-dealers and the services they offer to investors with retirement accounts.” In its “Examination Priorities for 2016” OCIE indicated that it “will continue this initiative, which includes examining the reasonable basis for recommendations made to investors, conflicts of interest, supervision and compliance controls, and marketing and disclosure practices.”[28] While OCIE’s 2017 examination priorities have not yet been released, investment advisers can expect continued scrutiny on IRA rollovers.
  1. Plan Consultant Suggestions to Not Undertake An IRA Rollover. Investment consultants to plan sponsors increasingly suggest, through various educational materials, that plan participants not engage in IRA rollovers and, instead, retain the assets in the qualified retirement plan. Ostensibly this benefits the investment consultant, if fees are tied to the amount of funds in the plan, by retaining assets. From the plan sponsor’s standpoint, this only increases the amount of potential liability should a class-action claim later be asserted, and this may increase the plan sponsor’s costs if it is directly paying for any of the plan’s expenses.
The literature on IRA rollovers has been an increased focus of SEC scrutiny. However, in this author’s review of various brochures and online information, it is apparent that the advantages and disadvantages of qualified retirement plan to IRA rollovers are presented quite differently, depending upon whether the firm authoring the brochure would benefit – or not benefit – from the IRA rollover.
For example, the excerpt from one brochure, found below and on the next page, sets forth the “Advantages” and “Disadvantages” of leaving assets in a plan, versus an IRA rollover, from the perspective of one firm.[29] Similar disclosures, albeit with greater discussion of the advantages and disadvantages and perhaps more specific to the specific client, should exist within any analysis presented in connection with an IRA rollover. 
  1. What Role Does the Plan Sponsor Have in Connection with IRA Rollovers?
An American Bar Association Section of Taxation 2014 newsletter article, directed at plan sponsors, concludes that the plan sponsor should be more greatly involved in distribution decisions by plan participants, including IRA rollovers:
First, a decision to make a rollover IRA should not be made lightly, wantonly or unadvisedly: the decision has very important ramifications for the individual’s future financial security. Even a modest rollover by a young individual may feature largely when he or she comes to retire. Second, plan fiduciaries should consider taking steps to explain better the options available to a participant taking a distribution and to monitor the types and sources of advice he or she receives in connection with the distribution. Such precautions may help the participant make a better decision and may also protect the fiduciary against claims that it failed to satisfy its responsibilities under ERISA.[30]
While the foregoing recommendation that plan sponsors “monitor the types and sources of advice” a plan participant receives in connection with the distribution,” there is no discussion of how such a monitoring process would be put in place. Any such attempt at monitoring, given the large number of sources of IRA advice, would seem to impose an unrealistic and unattainable obligation on the plan sponsor. Moreover, while a handout or other education listing of general considerations a plan participant should consider would appear a prudent measure that could be undertaken by plan sponsors, the inference that a plan sponsor possesses a duty under ERISA to monitor the advice received by plan participants in connection with IRA rollovers is not supported by the case law.
The same article goes on the list some of the advantages and disadvantages of IRA Rollovers:
Advantages and Disadvantages of Rollovers
An IRA rollover has several advantages. It severs the tie with the former employer, gives the participant the greatest degree of control, and makes it possible for the participant to take irregular distributions or to stretch-out distributions to the greatest extent allowed by the age 70½ minimum distribution rules. However, there are also significant disadvantages, which are often not fully understood by the participant. First, the participant is now responsible for the successful long-term investment of the funds, generally with no review of available options by a fiduciary. Second, the participant must avoid engaging in any prohibited transaction, as that would trigger immediate taxation of the entire account. I.R.C. §408(e)(2). Figuring out how the prohibited transaction rules apply to IRAs is fiendishly difficult, and many IRA owners succumb to the siren calls of exotic investment vehicles (bull semen, anyone?). Third, the individual no longer has the benefit of the ERISA fiduciary responsibility rules, as many victims of Ponzi schemes discovered to their chagrin. Most cases have held that the duties of an IRA custodian are limited to those it accepted in its contract with the IRA owner, a contract almost always drafted by the custodian. Attempts by the DOL and the SEC to extend fiduciary rules to IRAs and broker-dealers are highly controversial and appear to be bogged down for the time being. Fourth, employer plans often offer lower fees, typically provide more transparent fee disclosures, and give better access to advice.[31]
Again, the article appears to paint a bleak picture of the risks pertaining to an IRA rollover. This is especially so since in 2014 many “retirement consultants” to plan sponsors did not assume fiduciary status; this resulted (and continues to result) in class-action claims against plan sponsors in which the “retirement consultant” (i.e., insurance company or broker-dealer, and its agents) is not held accountable for the advice provided as the standard of care deemed applicable is the low standard of suitability.
One might conclude that while plan sponsors might possess the duty to educate, generally, plan participants about IRA rollovers in as objective a manner as possible, such as through brochures highlighting the advantages and disadvantages of IRA rollovers, no duty likely exists to “monitor” advice provided by third-parties to plan participants in connection with a planned QRP to IRA rollover.
  1. Due Diligence Checklist for QRP/IRA Rollovers to IRA Accounts for Fiduciaries.
Considering all of the foregoing, the following items might be included in a checklist for a QRP-to-IRA, or IRA-to-IRA, rollover due diligence analysis. This checklist is set forth on the pages that follow.


IRA Rollover Due Diligence Checklist
STEP ONE: GATHER INFORMATION FOR THE SOURCE QRP OR SOURCE IRA ACCOUNT.
QRP/IRA: Obtain Client’s Current Holdings. A list of the prospective client’s current holdings in the QRP or IRA account should be obtained. Often the plan participant or IRA account holder can produce this by accessing current holdings information online and providing an up-to-date statement. At other times the plan participant can provide her/his last quarterly statement). Prospective clients could also provide a view of the client’s holdings through account aggregation solutions. For example, this author utilizes BlueLeaf (www.BlueLeaf.com), which enables prospective clients to link their accounts to the software; this permits an integrated view of a client’s holdings, as well as account-specific views. Generally, unless the information is provided in other documents, the adviser should ask a participant for his most recent quarterly statement, which should reflect any expenses being charged against the participant’s account, as well as how the participant is invested and the account balance.
QRP: Ascertain Loan Amounts. Ascertain if any loans are currently outstanding against the QRP assets by the prospective client.
QRP: Ability of Prospective Client to Stay with the QRP. Some employers require retired plan participants to depart from the plan within a certain period of time, or by a certain age. This information is best found in the Summary Plan Document (SPD) for the plan, which should be available upon request from the plan administrator (or plan sponsor).
QRP: Available Investments. Obtain a list of all available investments inside the QRP. Specific attention should be given to ascertaining whether a Guaranteed Investment Contract exists within the QRP, and if so both the current rate provided by such G.I.C. and the liquidity constraints imposed.
  • The adviser should ask the participant for a copy of the plan’s 404a-5 disclosures (which are also known as participant disclosures and/or the Investment Comparative Chart). These materials are provided to participants when initially eligible and, again, each year thereafter.
QRP: Employer Stock. In connection with the foregoing, the adviser should ascertain if any of the current holdings in the QRP constitute employer stock.
QRP: Annuitization Options. Ascertain the annuitization options that exist within the QRP.
QRP: Fees Charged to Plan Participants. Ascertain the fees charged by third-party administrators, recordkeepers, and/or retirement plan consultants and/or investment advisers (other than the investment product fees themselves), that are borne by the plan participant.
QRP: Services Provided by Plan Sponsor. The services provided to plan participants, and any additional fees charged for such services, which might include but not limited to: (a) investment educational materials or web sites; (b) educational seminars (and a summary of the content thereof); (c) asset allocation software, if any; and (d) financial planning advice – in-person or via software or online portals, if any.
IRAs/QRPs: Investment Policy (Statement). A determination should be undertake as to whether an investment policy and/or strategy is utilized in connection with the prospective client’s current investments, such as may be found in a “model portfolio” suggested by the plan’s investment adviser, or as may be utilized within a target date (or similar) fund utilized by the prospective client, or as otherwise may have been suggested to or be utilized by the prospective client. If an Investment Policy Statement was prepared for the prospective client, a copy of this document should be obtained.

STEP TWO: GATHER INFORMATION ABOUT THE PROSPECTIVE CLIENT.
Obtain information sufficient to formulate personal financial statements for the client, to inform the strategic asset allocation, and to determine suitability.
Personal Information. The prospective client’s name, address, and date of birth should be obtained. Ideally the names and dates of birth of the prospective client’s spouse, children, grandchildren, and other close family members and friends (and pets, too!) should also be obtained.
Discover the Prospective Client’s Personal Values and Goals. The prospective client’s accumulation of wealth is not an end, but rather a means. Hence, ascertaining the prospective client’s lifetime financial goals is required. This, in turn, informs the determination of future levels of expenses.
  • It is recommended that you discern the client’s attitude toward money and/or wealth. This can be done by one of two questions (with follow-up questions thereafter):
    • “What’s important about money to you?” (See articles, materials, and books written by Bill Bachrach of Bachrach & Associates, Inc.)
    • “What does money mean to you?” (See articles, materials written by John Bowen and others of CEG Worldwide, Inc.)
  • It is recommended that goals of the prospective client be ascertained by questions such as the following:
    • “What are the tangible goals that will require you to have some money and
      planning to achieve?” (See articles, materials, and books written by Bill Bachrach of Bachrach & Associates, Inc.)
    • This author likes the five-year question: “If a doctor were to tell you that you have 5-6 years to live, and during that time you will be as healthy as you are now, what would you like to do, or accomplish, so at the end of that time you have no regrets?” (A form of this question is used in “Discovery Conferences” as suggested by CEG Worldwide, Inc.)
  • George Kinder, founder of the Kinder Institute of Life Planning (which trains financial advisers in life planning) and author of “The Seven Stages of Money Maturity,” has developed three questions to try to elicit what people want from their lives.
  • Mitch Anthony is another well-regarded consultant who has developed questions that help to determine the client’s values and goals.
Personal Health. The presence of any medical conditions that might influence the prospective client’s ability to accomplish their goals, and/or affect their life expectancies, should be explored.
  • It is suggested that inquiry be made as to the longevity of family members, and the causes of death of any family members and their ages at the end of lifetime. Genetics has been shown to play a major role in longevity, although lifestyle is also important.
Statement of Personal Net Worth. Enough information should be gathered so that you can summarize the prospective client’s current assets and liabilities. Liquid assets should be distinguishable from illiquid or personal use assets. Information on liabilities, such as interest rate, fixed or variable, payment amount, months to payoff, and tax-deductibility of interest, should be set forth.
  • While there is no requirement that a GAAP-compliance financial statement be prepared, sufficient detail should exist in the net worth summary that it can form the basis for further analysis.
  • Specific information on any existing QRP loans should be set forth.
  • Inquiry should be made as to whether the prospective client is in expectation of any windfalls, such as a prospective inheritance and/or a settlement of a lawsuit. Concurrently, any contingent liabilities should be ascertained.
Statement of Projected Income and Expenses. Determining an asset allocation for a prospective client is highly dependent upon the prospective client’s need for funds. This, in turn, is driven by the client’s projected income, from all sources, and projected expenses – both currently and during retirement years.
  • Again, there is no particular form of this statement. Sources of income should be explored, as well as how dependable such sources of income.
    • For example, a university professor with tenure in a college with a growing cohort of students likely possesses a high degree of job security, and hence income security. In contrast, a manager in a construction firm would likely possess far less job security.
    • The presence of disability insurance should be ascertained, and may be indicated in this document.
    • The presence of life insurance to replace lost income upon the end of lifetime of a bread winner could be indicated in this document.
  • This statement of projected income and expenses forms the basis for further analyses and for discussions. It is likely to be amended periodically, as the client’s situation and goals change, should the client become a client.
Complete a RIsk Tolerance Questionnaire with the Prospective Client. While the ability of such questionnaires to properly measure a client’s risk tolerance is questionable, given various behavioral biases individual investors possess, the changing investment educational level of the client as the process of advising is undertaken, and the limitations of any set of questions (as to both number, quality, and understandability), the answers to a risk tolerance questionnaire will nevertheless provide information that can inform the determination of a proper strategic asset allocation for the client. Some state securities regulators require an RTQ, as does the DOL in both the BICE and streamlined BICE exemptions.
  • This author is not convinced that technology has evolved so as to permit the determination of a strategic asset allocation based upon a client’s risk tolerance.
  • While risk tolerance should be ascertained, risk capacity and the need and desire to take on risk should also be ascertained.
STEP FOUR: ANALYZE THE CURRENT INVESTMENT STRATEGY.
Undertake an analysis of the client’s current investment strategy.
  • What investment policies exist?
  • Are the investment strategies currently utilized supported by sufficient evidence?
  • How might current valuation levels of various asset classes influence the future results of the investment strategies?
STEP FIVE: ANALYZE THE CURRENT INVESTMENTS (AVAILABLE OR UTILIZED).
QRPs Only. If the prospective client is retiring from the company, or has already retired, determine whether the plan sponsor allows the prospective client to remain with the QRP, and for how long.
QRPs Only. Assess any guaranteed investment contract that provides a fixed return for a period of time with no interest rate risk. Determine the financial strength of the insurance company providing this guarantee.
QRPs Only. Assess and summarize the characteristics of any lifetime annuitization or other annuitization options within the qualified retirement plan.
QRPs Only. Undertake and summarize an assessment of the Target Date Fund that is most likely to be suitable for the client. Include a summary of its current asset allocation, fees, and costs.
QRPs and IRAs. Undertake and summarize an assessment of each mutual fund, ETF or other investment vehicle currently utilized by the client.
QRPs: Services, Fees, and Costs. Summarize the services (including but not limited to investment education, investment advice, distribution mechanisms) of the qualified retirement plan, as well as the fees and costs associated with such services.
  • Summarize any constraints existing as to those services. For example, rudimentary financial planning software and/or retirement distribution projections placed on the client’s statements, may (following an analysis by you) be viewed as too simplistic or misleading or just incorrect.
  • Summarize the fees associated with any distributions, if monthly or other distributions are  likely desired by the client.
  • Summarize whether automatic monthly distributions directly from the QRP to a client’s personal account are possible. 
STEP SIX. SET FORTH THE INVESTMENT STRATEGY FOR THE DESTINATION IRA.
STEPS SIX, SEVEN AND EIGHT COULD BE UNDERTAKEN ONCE BY AN ADVISER, AND UPDATED ANNUALLY. VARIOUS OPTIONS COULD EXIST THAT PERMIT EASY CUSTOMIZATION FOR PARTICULAR CLIENTS.
Minimize Idiosyncratic Risk in Your Investment Policy Design. In accordance with the requirements of the prudent investor rule, your investment strategy should be designed and be able to minimize idiosyncratic risk through broad diversification among securities.
  • Idiosyncratic risk, also called diversifiable risk or unsystemic risk, is risk that is unrelated to the overall market risk. In other words, idiosyncratic risk that that risk which is firm-specific and can be diversified through holding a portfolio of individual securities. Unsystematic risk is also known as “specific risk” or "residual risk.”
Implementation Through Low-Cost Investment Securities/Products Should Be Available. Your investment strategy should be able to be implemented through investment securities or other investment or insurance products that possess relatively low costs. There are several investment strategies that possess academic support but which may not be “investable” due to high costs associated with their implementation.
  • For example, a pure momentum strategy may not be able to be implemented absent significant transaction costs. However, the use of the momentum factor by a mutual fund, in timing the trading of equities, might add value.
Investment Policy Statement. It is recommended that a summary of the firm’s investment strategy be set forth in an Investment Policy Statement (IPS) prepared for the client.
  • While an IPS is not required for a plan participant or IRA account owner under current law, an existing federal court decision suggests that it is per se malpractice to not possess one for a plan sponsor.
At a minimum, the firm’s Form ADV, Part 2A should describe the firm’s main investment strategies. This description is usually in less detail than that provided in an IPS, however.
Possess Proper Evidentiary Support for Your Recommended Investment Policy. Set forth a summary of the generally accepted academic research, back-testing, or a reliable and robust intellectual analyses that provides the basis for your own investment policy recommendations.
  • Your firm’s Investment Committee should possess a document that explores the firm’s approved investment strategies, particularly those selected for utilization by the firm. While this internal document represents the firm’s own internal due diligence, and is not likely to be approved for distribution to clients, you should obtain this document and be familiar with its contents.
  • In the world of finance, “generally accepted academic research” will likely require, at a minimum, consensus about an investment strategy by several different academics, all undertaking the analysis objectively and without a vested interest in the conclusions.
    • A survey of the research underpinning most suggested investment strategies can likely be obtained via the Social Science Research Network. However, access to a large number of leading industry publications should also be obtained.
    • While there are hundreds, if not thousands, of investment strategies in the marketplace today, it is likely that only a few such investment strategies will meet the justification requirement set forth above. Given the tax-preferred status of retirement accounts, the DOL has required the investment of such funds adhere to the strict dictates of the prudent investor rule. Speculative strategies, and those not backed by sufficient evidence, should be avoided.
    • For example, a sufficiently large body of academic evidence supports the use of the value, momentum, and profitability factors – to the extent that such strategies could be considered “generally accepted.” A bit more controversial, however, are the small market capitalization and investment factors. In addition, some controversy exists as to whether one or more of these factors will continue and/or whether they will be as robust. Other investment strategies exist that are backed by credible evidence; this author’s discussion of just a few investment factors is not intended to preclude the consideration of other investment strategies.
STEP SEVEN. SET FORTH THE MATERIAL FACTS REGARDING EACH SPECIFIC INVESTMENT RECOMMENDED FOR THE PROSPECTIVE CLIENT.
Summarize Fees, Costs of Investment Products Recommended. Set forth the specific investment securities or products to be utilized in the rollover IRA, and discuss how the strategy and the specific securities meet the prudent investor rule’s requirements to minimize idiosyncratic risks and meet the duty to avoid waste (as to fees and costs).
  • Broad diversification is strongly recommended as a means to reduce idiosyncratic risk within each asset class. This is not the same as reducing the standard deviation of the portfolio to an acceptable level, as may be obtained for the equity portion of a portfolio by as few as 30 or 40 securities. Rather, the risk of a price decline in any particular stock impacting significantly upon the portfolio should be minimized; this will likely require broader diversification among hundreds or thousands of individual securities. For most investors, this will likely lead to the use of broadly diversified mutual funds and exchange-traded funds, or similar pooled investments, rather than individual stocks and/or debt securities (at least when such debt securities are not backed by the full faith and credit of the U.S. government.)
  • Formulate an estimate of the total fees and costs of the rollover IRA to the investor, including those from investment security/product fees (including an estimate of the costs of investment products not included in the annual expense ratio, such as the transaction and opportunity costs found within pooled investment vehicles, and including any offsets provided to the fund by securities lending revenue.
  • Set forth a listing of the services to be provided during and following the IRA rollover, and the fees to be charged for such services. Such services might include those relating to investment design and management, financial planning, tax planning, concierge services, and more. These might be contained in your Client Services Agreement.
STEP EIGHT. SET FORTH YOUR SERVICES, FEES, AND VALUE PROPOSITION.
Undertake Benchmarking of Your Firm’s Services and Fees. Benchmarking of investment adviser fees against the fees charged by firms offering the same or similar services is required under BICE. While there is no requirement that the adviser charge the lowest fee in the marketplace, the adviser’s fees must be “reasonable” given the level of services provided. There is no requirement that the results of your benchmarking be furnished to the client.
  • While “reasonable fee” cases are tough to prevail upon for both regulators and plantiffs’ attorneys, the presence of such a claim in conjunction with other concerns (such as a breach of the duty of loyalty) could complicate an arbitration or other legal proceeding, and influence the outcome.
  • A firm offering only investment advice is at most risk of claims for charging an unreasonable fee. In contrast, firms that bundle together financial planning, life planning, or other “qualitative” advice a much stronger argument to defeat a reasonable fee claim. In such circumstances, it is easier to argue that an adviser who possesses, and actually employs, advice on qualitative issues is “worth” the additional fees charged for such services.
Articulate and Set Forth In Writing Your “Value Proposition.” Why are your fees justified? Your value proposition should be unique to you, and to the services that you provide. Many different resources are available on how to articulate your value proposition; I set forth some below.
Value Proposition – From Mitch Anthony:
  • OrganizationWe will help bring order to your financial life, by assisting you in getting your financial house in order (at both the “macro” level of investments, insurance, estate, taxes, etc., and also the “micro” level of household cash flow). (Source: Mitch Anthony via Michael Kitces article)
  • AccountabilityWe will help you follow through on financial commitments, by working with you to prioritize your goals, show you the steps you need to take, and regularly review your progress towards achieving them. (Source: Mitch Anthony / Michael Kitces.)
  • ObjectivityWe bring insight from the outside to help you avoid emotionally driven decisions in important money matters, by being available to consult with you at key moments of decision-making, doing the research necessary to ensure you have all the information, and managing and disclosing any of our own potential conflicts of interest. (Source: Mitch Anthony / Michael Kitces.)
  • ProactivityWe work with you to anticipate your life transitions and to be financially prepared for them, by regularly assessing any potential life transitions that might be coming, and creating the action plan necessary to address and manage them ahead of time. (Source: Mitch Anthony / Michael Kitces.)
  • Education. We will explore what specific knowledge will be needed to succeed in your situation, by first thoroughly understanding your situation, then providing the necessary resources to facilitate your decisions, and explaining the options and risks associated with each choice. (Source: Mitch Anthony / Michael Kitces.)
  • PartnershipWe attempt to help you achieve the best life possible but will work in concert with you, not just for you, to make this possible, by taking the time to clearly understand your background, philosophy, needs and objectives, work collaboratively with you and on your behalf (with your permission), and offer transparency around our own costs and compensation. (Source: Mitch Anthony / Michael Kitces.)
“Your value proposition needs to communicate: • Who you are. • What you do (not how you do it). • What problem you solve. (You want people to say, “This is exactly what I am looking for.”) • Who your ideal client is. • Why your approach is more valuable than other approaches. • Why you can help people reach their goal. (After all, this is your core competency.)” - Teresa Riccobuono, “Your Value Proposition: A Precursor to the Elevator Pitch,” Advisor Perspectives (June 4, 2013).
Brooke Southhall. The editor of RIABiz once wrote: “The RIA’s ultimate value proposition, therefore, is your belief that it is your destiny as one to help clients realize theirs.” See http://riabiz.com/a/2011/10/28/what-is-the-value-proposition-of-a-financial-advisor-and-how-is-a-budding-ria-culture-upping-the-ante
Investment Policy Statement Inclusion. A best practice would be to include your value proposition as part of the Investment Policy Statement, or perhaps in another document (such as your Client Services Agreement). In this regard, a more generalized statement of your value proposition might be more appropriate; care should be taken to neither promise nor guarantee any quantified “alpha” or “gamma” to the client.
Cite to Vanguard’s Advisor’s Alpha. See “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®.” Vanguard Research (2016). The full report should be retrieved from: https://www.vanguard.com/pdf/ISGQVAA.pdf
David Blanchett, CFA and Paul Kaplan – Morningstar’s Gamma. Their 2014 paper, “Alpha, Beta, and Now…Gamma,” is available at https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf. In a later article, David Blanchett wrote: “We focused on five areas in which advisors can add significant value: (1) Taking a total wealth framework to determine the optimal asset allocation; (2) Using a dynamic approach to determine the appropriate portfolio withdrawal in retirement; (3) Incorporating guaranteed income products (such as annuities) in an optimal way; (4) Allocating to investment vehicles to maximize tax efficiency; and (5) Optimizing investment portfolios to incorporate liabilities (such as the amount of savings needed to properly fund retirement). We showed that each of these five gamma components creates value for retirees. When combined, they can be expected to generate 23% more income on a utility-adjusted basis when compared to a naïve strategy. This additional income is equivalent to an arithmetic “alpha” of 1.59 percentage points. We called this gamma-equivalent alpha, and it represents a significant potential increase in portfolio efficiency (and retirement income) for retirees.”
STEP NINE. UNDERTAKE THE COMPARATIVE ANALYSIS.
KEY PRELIMINARY CONSIDERATIONS IN THE COMPARATIVE ANALYSIS. The final step in your analysis is comparing your analysis of the client’s existing QRP options, or IRA account, to the investment policy and investment products that you recommend, as well as the services the client currently receives to the services you provide.
Annuitization Analysis. I suggest that any analysis include the adviser’s perspective on whether lifetime annuitization is a worthwhile option for the client to consider. Contrasting any options available inside the QRP with those typically recommended by the adviser should be undertaken. In such connection, insurance company financial strength is a key consideration, and Comdex scores should (at a minimum) be set forth in the analysis for each insurance company providing the annuity under consideration. Such an analysis might also includE an evaluation of the single life, spousal (with and without reduced benefits to the survivor), term certain, and combinations of the foregoing, and include further an evaluation of the possible use of CPI adjustments in the annuity contract to keep pace with increased spending needs, and might further include the possible use of a staggered approach to annuitization, and might also include the available of deferred annuities with payouts commencing at later ages, and including further the risks and return characteristics of certain annuities, the costs and fees associated with same, the possible applicability of premium taxes, the various riders which might be employed and their costs and benefits and limitations
G.I.C. Analysis. Another key component of any analysis will involve consideration as to whether to use the G.I.C. contract present in a prospective client’s QRP for a portion of the client’s fixed income allocation. If so, a partial IRA rollover may be prudent, rather than a complete IRA rollover.
401(k) Loan Analysis. If the prospective client has a loan against his or her QRP, the analysis should include whether, and how, such loan will be retired.
Liquidity Analysis. If the prospective client is not yet age 59½, consideration should be given as to whether the current QRP loan provisions, if any, might be utilized in the future as a means of providing interim support, whether a 72(t) election should be undertaken (and if so, how), and/or whether the QRP plan permits penalty-free withdrawals at age 55 and thereafter. Greater attention might be paid to the issue of liquidity where the client possesses an inadequate cash reserve and/or no access to a home equity or other line of credit should a future short-term need for cash arise, and if the client does not possess savings/investments in nonqualified accounts.
Fees/Cost Comparisons, Taking Into Account Differences in Education and Other Services Provided. This may form the core of the comparative analysis. There is no magic format for such an analysis. But with your value proposition in hand, it should become apparent to most financial advisers that they can provide a higher level of service than that received by a prospective client who is in a qualified retirement plan, and that the value added by their services and advice more than justifies the reasonable fees charged for those services. [This author provides a free “second opinion” to most prospective clients. This second opinion includes a comparison of the client’s existing and proposed portfolios under three primary considerations: (1) asset allocation (and expected gross returns); (2) fees and costs (and expected net returns, as a result) utilizing a “total fees and costs” spreadsheet which includes (for pooled investments) an estimate of implementation shortfall costs (resulting from transactions within a fund) and any offsets from estimated securities lending revenue; and (3) portfolio tax efficiency observations. These are followed by a summary of the adviser’s value proposition to the client.]
Other Material Tax/Financial Planning Issues. Part of such a comparative analysis might include the broad variety of financial and/or tax strategy issues that might be present or might arise. If such considerations significantly impact the other portions of the adviser’s value proposition, they would be appropriate for at least a general discussion. Otherwise, an adviser might simply point out that he/she will consider these other considerations if the prospective client proceeds to engage the adviser. Such additional considerations are summarized below.
Protection from Creditors and Legal Judgments—Generally speaking, plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. QRPs, SIMPLE IRAs, SEP IRAs, and rollover traditional IRAs are protected in bankruptcy proceedings regardless of amount; contributory IRAs and Roth IRAs and rollovers from SIMPLE IRAs and SEP IRAs are protected in bankruptcy proceedings only up to $1,283,025 (as of April 1, 2016; the amount is increased annually to reflect inflation, annually). For a more detailed discussion, see http://www.wickenslaw.com/wp-content/uploads/2014/09/Handout-Protection-of-IRA-Qualified-Retirement-Plan-Assets-After-Clark-v-Rameker-8-19-14.pdf.
State laws vary in the protection of IRA assets in lawsuits, outside of bankruptcy proceedings. The laws for the client’s likely state of domicile should be researched. See http://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf (2014).
Continued Employment and Required Minimum Distributions—Once an individual reaches age 70½, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 70½, however, he generally is not required to make required minimum distributions from his current employer’s plan, if he is still working. This may be advantageous for those who plan to work into their 70s.
Employer Stock—An investor who holds significantly appreciated employer stock in a plan should consider the negative tax consequences of rolling the stock to an IRA. If employer stock is transferred in-kind to an IRA, stock appreciation will be taxed as ordinary income upon distribution. The tax advantages of retaining employer stock in a non-qualified account should be balanced with the possibility that the investor may be excessively concentrated in employer stock. It can be risky to have too much employer stock in one’s retirement account; for some investors, it may be advisable to liquidate the holdings and roll over the value to an IRA, even if it means losing long-term capital gains treatment on the stock’s appreciation.
SIMPLE IRA Early Distribution Penalty. – The 2-year-from-inception restriction on distributions from SIMPLE IRA accounts should be considered, when pertinent.
Additionally, this author notes that the prudent investor rule generally requires that the adviser consider the other accounts and property of the client. These aspects of the due diligence analysis also highlight possible additional reasons that justify professional management of a client’s accounts – at least these aspects of financial and tax planning are integrated with, or provided alongside, the investment advisory services. These considerations include, but are not limited to, the following:
  • The most tax-efficient manner to design, implement and manage a client’s entire portfolio, which might consist of QRPs, traditional IRAs, Roth IRAs, nonqualified annuities, life insurance cash values, taxable accounts, 529 college savings plans accounts, HSA accounts, and other types of accounts, generally, in order to best secure for the client the likely attainment of the client’s objectives;
  • The restrictions which exist on the availability of foreign tax credits and/or deductions for foreign stock funds held in tax-deferred or tax-free accounts, as opposed to taxable accounts;
  • The best manner to minimize future potential income tax liability for both the clients and the client’s potential heirs, including the role of stepped-up basis;
  • The availability of tax-managed or tax-efficient stock mutual funds in taxable accounts;
  • The marginal rates of tax (federal, state and local) which might be imposed upon ordinary income and long-term capital gain income, and qualified dividend income, both in the current year and in future years;
  • Ways to design or manage the taxable account to avoid realization of short-term capital gains and/or long-term capital gains, as well as ways to design or manage the investment to promote the harvesting of capital losses in taxable accounts and how such losses may offset either various types of capital gains or ordinary income (up to certain annual limits);
  • Whether Roth IRA conversions should be considered, and if so when and to what extent, whether separate Roth IRA accounts might be established during conversions for different investment assets, and whether re-characterizations might take place thereafter (within the time frame permitted) for assets held in either one or more of such separate Roth IRAs;
  • Whether distributions from tax-deferred (qualified or nonqualified) accounts might be undertaken to generate additional ordinary income, in order to mitigate the effect in any year of the alternative minimum tax;
  • The increased amount of premiums for Medicare Part A which might result should the client’s/clients’ modified adjusted gross income exceed certain limits;
  • The effect of additional income resulting from QRP or IRA distributions, or from other investment-related income, on the taxation of social security retirement benefits;
  • The interplay between the timing of taking social security retirement benefits, income tax itemized vs. standard deduction strategies, the receipt of various forms of income, and the taking of QRP or IRA distributions, given the various marginal income tax rates the client is likely to possess, then and in the future, for both federal and state tax purposes; and
  • The ability to take investment advisory fees from certain types of accounts, the best methods to allocate fees and pay them from various types of accounts, the potential for deductibility of fees when paid from certain types of accounts, and avoidance of prohibited transactions which might otherwise result if fees for non-investment advisory services are incorrectly paid from QRP or IRA accounts.
PRESENTATION OF RECOMMENDATIONS TO THE CLIENT.
There is no requirement to present the analysis so undertaken to the client. Indeed, I don’t recommend presenting such a comprehensive analysis to the client, as it may merely provide fodder for a plantiff’s attorney.
However, under DOL regulations, the IRA rollover analysis should be retained in the adviser’s files for six years.
Instead, presenting a proposed Investment Policy Statement, proposed Client Services Agreement, and a cover letter summarizing the analysis, recommendations, and value proposition, would be more appropriate.

In summary, the analysis of an IRA rollover is not an easy process. A multitude of considerations are present. Some of these considerations can be delayed for more complete analysis after the prospective client has engaged the adviser, while other aspects of the analytical process must be addressed when recommending an IRA rollover.
However, much of the analysis regarding the firm’s own investment policy, investment recommendations, services, fees, and value proposition (see Steps 6-8 above) can be utilized over and over again.
Additionally, firms who deal with multiple IRA rollovers from the same QRPs are likely to be able to streamline their IRA rollover analysis, at least with respect to those plans.
Larger firms are likely to form units dedicated to time-efficiently producing IRA rollover analyses.
Some firms will need to hire additional staff to undertake IRA rollover analyses. Such work might be most suitable for new graduates of undergraduate financial planning baccalaureate degree programs, as part of an introductory residency or initial training program. In addition, interns might be utilized.
Author’s shameless plug … If you are looking for top-quality graduates or (paid) interns, Western Kentucky University (Bowling Green, KY) graduates a few dozen each year. Most of our students are originally from the Midwestern and Southern states (Florida to Virginia, to Illinois, to Louisiana, and then to Georgia). However, many of our graduates are also open to practicing in the Western or Northeast regions. Drop me a line if you have a current job opening for a new financial / investment adviser. Email: ron.rhoades@wku.edu. Thank you!
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As always, if you have any suggestions for revised or additional content for this memorandum, please e-mail me at your convenience. Ron Rhoades: ron.rhoades@wku.edu.
                  THANK YOU.



[1] Ron A. Rhoades, JD, CFP® serves as Director of the Financial Planning Program for Western Kentucky University’s Gordon Ford College of Business. He is an Assistant Professor – Finance, an attorney, an investment adviser, and a frequent writer on the fiduciary standard as applied to financial services. A frequent speaker at national and regional conferences, he also serves as a consultant to firms on the application of the DOL Conflict of Interest Rules, fiduciary law, and related issues. This article represents his views only, and not those of any institution, firm or organization with whom he may be associated. This article is believed to be correct at the time it is written; subsequent laws, regulations, and/or developments regarding the interpretation or enforcement of ERISA, the I.R.C., and DOL regulations should be consulted. Please direct all questions and requests via email: Ron.Rhoades@wku.edu
[2] The DOL, in its first set of FAQs (dated Oct. 27, 2016) on the rules, stated:
Q4. Is compliance with the BIC Exemption required as a condition of executing a transaction, such as a rollover, at the direction of a client in the absence of an investment recommendation?
No. In the absence of an investment recommendation, the rule does not treat individuals or firms as investment advice fiduciaries merely because they execute transactions at the customer’s direction. Similarly, even if a person recommends a particular investment, the person is not a fiduciary unless the person receives compensation, direct or indirect, as a result of the advice.
If, however, the firm or adviser does make a recommendation concerning a rollover or investment transaction and receives compensation in connection with or as a result of that recommendation, it would be a fiduciary and would need to rely on an exemption. Under the terms of the Rule, a “fee or other compensation, direct or indirect,” includes any explicit fee or compensation for the advice received by the adviser (or by an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the recommended purchase or sale of a security or the provision of investment advice services, “including, though not limited to commissions, loads, finder’s fees, revenue sharing payments, shareholder servicing fees, marketing or distribution fees, underwriting compensation, payments to brokerage firms in return for shelf space, recruitment compensation paid in connection with transfers of accounts to a registered representative’s new broker-dealer firm, gifts and gratuities, and expense reimbursements.”
[3] Best Interest Contract Exemption, 81 Fed. Reg. 21,079 (April 8, 2016). The actual language of the rule follows:
(1)    Prior to or at the same time as the execution of the recommended transaction, the Financial Institution provides the Retirement Investor with a written statement of the Financial Institution’s and its Advisers’ fiduciary status, in accordance with Section II(b).
[Section II(b) provides: “The Financial Institution affirmatively states in writing that it and the Adviser(s) act as fiduciaries under ERISA or the Code, or both, with respect to any investment advice provided by the Financial Institution or the Adviser subject to the contract or, in the case of an ERISA plan, with respect to any investment recommendations regarding the Plan or participant or beneficiary account.”]
(2)    The Financial Institution and Adviser comply with the Impartial Conduct Standards of Section II(c).
(3)    (i) In the case of a recommendation to roll over from an ERISA Plan to an IRA, the Financial Institution documents the specific reason or reasons why the recommendation was considered to be in the Best Interest of the Retirement Investor. This documentation must include consideration of the Retirement Investor’s alternatives to a rollover, including leaving the money in his or her current employer’s Plan, if permitted, and must take into account the fees and expenses associated with both the Plan and the IRA; whether the employer pays for some or all of the plan’s administrative expenses; and the different levels of services and investments available under each option; and
(ii) in the case of a recommendation to rollover from another IRA or to switch from a commission-based account to a level fee arrangement, the Level Fee Fiduciary documents the reasons that the arrangement is considered to be in the Best Interest of the Retirement Investor, including, specifically, the services that will be provided for the fee.
[4] DOL Advisory Opinion 2005-23A (Dec. 7, 2005), available at https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/advisory-opinions/2005-23a. 
[5] Id.
[6] ERISA § 404(a)(1)(B), 29 U.S.C. § 1104(a)(1)(B).
[7] Id. at p.2 (citations omitted).
[8] Id.
[9] See Annot., “Standard of Care Required of Trustee Representing Itself to Have Expert Knowledge or Skill”, 91 A.L.R. 3d 904 (1979) & 1992 Supp. at 48-49.
[10] Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th Cir.1983).
[11] Leigh v. Engle, 727 F.2d 113, 124 (7th Cir.1984).
[12] In re Dynegy, Inc. Erisa Litigation, 309 F.Supp.2d 861, 875 (S.D. Tex., 2004).  See also Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir.1983), cert. denied, 467 U.S. 1251, 104 S.Ct. 3533, 82 L.Ed.2d 839 (1984) ("this is not a search for subjective good faith - a pure heart and an empty head are not enough").” 
[13] Marshall v. Glass/Metal Ass'n & Glaziers & Glassworkers Pension Plan, 507 F.Supp. 378, 384 (D.Haw.1980).
[14] Keach v. U.S. Trust Co. N.A., 313 F.Supp.2d 818, 867 (C.D. Ill., 2004).
[15] See James J. Choi, David Laibson, Brigitte C. Madrian, Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds. ("We report experimental results that shed light on the demand for high-fee mutual funds. Wharton MBA and Harvard College students allocate $10,000 across four S&P 500 index funds. Subjects are randomized among three information conditions: prospectuses only (control), summary statement of fees and prospectuses, or summary statement of returns since inception and prospectuses. Subjects are randomly selected to be paid for their subsequent portfolio performance. Because payments are made by the experimenters, services like financial advice are unbundled from portfolio returns. Despite this unbundling, subjects overwhelmingly fail to minimize index fund fees. In the control group, over 95% of subjects do not minimize fees. When fees are made salient, fees fall, but 85% of subjects still do not minimize fees. When returns since inception (an irrelevant statistic) are made salient, subjects chase these returns. Interestingly, subjects who choose high-cost funds recognize that they may be making a mistake.")
[16] Id. at 1218.
[17] Id.
[18] Id.
[19] Id.
[20] See In re Brandt, Kelly & Simmons, LLP, SEC Release, 2004 WL 2108661, at *2 (Sept. 21, 2004) (stating that Advisers Act “incorporate[s] common law principles of fiduciary duties”).
[21] Santa Fe Industries vs. Green, 430 U.S. 462, 472 n.11 (1977), discussing SEC v. Capital Gains Research Bureau, 375 U.S. 180, 181 (1963); see also Transamerica v. Lewis, 444 U.S. 11, 17 (1979) (“As we have previously recognized, § 206 establishes ‘federal fiduciary standards’ to govern the conduct of investment advisers ….”).
[22] In the Matter of Alfred C. Rizzo, Investment Advisers Act Release No. 897 (Jan 11, 1984) (investment adviser lacked a reasonable basis for advice and could not rely on “incredible claims” of issuer); In the Matter of Baskin Planning Consultants, Ltd., Investment Advisers Act Release 1297 (Dec. 19, 1991) (adviser failed adequately to investigate recommendations to clients).
[23] Staff of the U.S. Securities and Exchange Commission, Study on Investment Advisers and Broker-Dealers (January 2011), at pp.27-8.
[24] SEC’s “Staff Study on Investment Advisers and Broker-Dealers - As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act” (Jan. 21, 2011), at p.62, citing In the Matter of the Application of Clinton Hugh Holland, Jr., Exchange Act Release No. 36621 at 10 (Dec. 21, 1995) (“Even if we conclude that Bradley understood Holland's recommendations and decided to follow them, that does not relieve Holland of his obligation to make reasonable recommendations.”), aff'd, 105 F.3d 665 (9th Cir. 1997).
[25] Id. at p.28.
[26] See Concept Release on the U.S. Proxy System, Investment Advisers Act Release No. 3052 (July14, 2010) (“Release 3052”) at 119.
[27] SEC Release No. IA-2333; “Registration Under the Advisers Act of Certain Hedge Fund Advisers” (Dec. 2, 2004).

[28] OCIE’s “Examination Priorities for 2016,” available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf. See OCIE Risk Alert, “Retirement-Targeted Industry Reviews and Examinations Initiative,” June 22, 2015, http://www.sec.gov/about/offices/ocie/retirement-targeted-industry-reviews-and-examinations-initiative.pdf.
[29] MassMutual Investment Group – MI1054 Disclosure Brochure (2016).
[30] David Pratt, “Points to Remember: IRA Rollovers,” ABA Section of Taxation Newsquarterly, Spring 2014.
[31] Id.