All posts by David Witz

Finding Value Under the New DOL Regime

It should be no surprise that everyone in the industry is contemplating what they must do to comply with the New DOL Fiduciary Regulation. Although there are still some hoping the litigation against the DOL will result in a suspension of the rule or an outright repeal by a newly elected administration, it has been my experience that most have accepted the new regulation since it conditionally protects the sale of commissionable products. However, favorable opinion has not resulted in much action on the part of financial institutions to implement strategies to deal with the new reg.

At this point, with approximately five months left until the April 10, 2017 effective date, it is highly unlikely that all financial institutions will be ready. Assuming a Financial Institution has not fully adopted all the requirements imposed by the new regulation what happens to Financial Institution and the advisers they support if they are not ready? There are two options:

  1. Establish a moratorium on the sale of any new products to new or existing clients along with a prohibition of providing recommendations/suggestions to existing clients
  2. Adopt some or none of the new requirements and continue providing recommendations with the understanding that since all the new requirements are not adopted all compensation received is received without an exemption and is subject to disgorgement along with lost opportunity cost, potential penalties and/or excise taxes since the exemption does not apply.

If option one is adopted the Financial Institution should be prepared for an exodus of advisers as they move to other Financial Institutions that are ready. On the other hand, option two is viewed by the plaintiff law firm community as low hanging fruit for litigation.

Necessity is the Mother of Invention

The necessity to meet this new rule by the effective date is the impetus for product manufacturers (“PM”) to identify “value adds” they can offer to keep the wheels of progress moving. A PM’s support will be particularly critical for small RIAs and independent broker dealers with limited capital resources. The top six key “value adds” that will keep your distribution channel in the production mode include:

1. Preparation of Documents: There are 44 different documents that need created based on all the various business models subject to the new DOL rules. Although few firms will need them all, a large PM could easily buy the raw documents and give them away to their distribution channel.

2. Buy a Block of Legal Time: Law firms are happy to discount their rates if you pay in advance for a large block of hours. A PM could underwrite a block of legal time they could make available to their clients to consult on the nuances within the documents that apply to their specific circumstances.

3. LMS Training Solutions: You cannot sell what you cannot explain under the new DOL Fiduciary Regime. Furthermore, you must be able to explain it in light of an ERISA fiduciary standard. This will be particularly challenging for advisers that have avoided ERISA plans but have a vast number of IRA clients. They not only need documented training on the product to support a claim they understand the product, they also need a thorough understanding of ERISA fiduciary standards of conduct.

The LMS system needs to provide the Compliance Officer of the RIA and/or B-D with the documentation to support who, when, what, and how were the advisers trained. Also, a test of their comprehension and the amount of time they spent on the subject should also be tracked. The cost to build an LMS system, the time to maintain it, and the expense of the design is a reasonable cost effective value add when multiple PMs share the cost. However, expect the B-D compliance officer to balk at a solution that is off their grid. Most B-Ds will want the education housed within their proprietary LMS system. This will add time and cost to the maintenance of the education modules. One last thought on education, keep it short (under 15 minutes) and gamify it if you want the digital generations who dominate our industry to embrace the process. Fortunately, it has also found favor with Boomers.

4. Build Date Feeds: If you cannot meet the Impartial Conduct Standards (“ICS”) you cannot meet the exemption. One key requirement is the adviser’s assertion the fees for their recommendation is reasonable. Unlike ERISA Section 408(b)(2), which requires the Responsible Plan Fiduciary to determine if the Covered Service Provider’s fees for services rendered are reasonable, the New DOL Fiduciary Regime requires the adviser to assert their fees are reasonable for their recommendations in light of the services they render.

In other words, you cannot de-link the recommendation from the cost of the investments, record keeping, administration, custody, trustee, or product vendor services rendered. This can only be accomplished efficiently if data links are created in a universal format that third party vendors providing technology solutions can access on behalf of advisers to support their efforts. If you can offer technology vendors access to the necessary data that is not provided by Morningstar you are one step ahead of your competition.

5. Secure Licenses to Benchmarking Solutions: Keep in mind, the determining reasonableness will require modifications to existing benchmarking solutions. “Levelization” will be a new term that will become the benchmarking standard for the future in order to make a recommendation that is in the best interest of the investor. In addition, the benchmarking solution will need to support advisers working with IRA investors.

6. Secure Licenses to Monitoring Systems: Most fee-based advisers already have a solution in place especially for retirement plans. On the other hand, many IRA investors receive performance reports but often times they lack comparatives to specific and relevant indexes with standards and criteria tied to their Investment Policy Statement. This will need to change since the applicable standard is an ERISA fiduciary standard.

Solutions for these top six “value adds” are limited. In fact, some have yet to be developed but are in the works. The legal contracts, for example, have been developed and are available through two different sources. There is a difference in cost and quality between the two. As far as training is concerned, I am aware of three solutions but the solution with the most flexibility covering the most topics is ERISA Training. You can view the particulars at

Finally, there are no benchmarking or monitoring solutions for IRAs that cover all annuity products and alternative investments, and there is very limited access to performance, risk, and expenses associated with those products. To create a viable benchmarking and monitoring solution, product, adviser, and client data will be needed to protect the adviser’s ability to utilize the insurance products that are in the investor’s best interest.

Is the DOL Fiduciary Rule the End of Solicitor Arrangements? – Part 2

In my last blog, I discussed why the solicitor structure has grown in popularity and why it will continue in the future but without the same benefits enjoyed in the past. In this blog post, I review how the DOL’s Fiduciary Rule will change the role and structure of the solicitor.

First and foremost, every solicitor will become a fiduciary on April 10, 2017. As a fiduciary, a financial adviser (FA) is subject to an ERISA fiduciary standard. This alone may be sufficient reason for some FAs to exit the industry, but what is more likely to happen is a flood of new fiduciaries will be marketing to retirement investors. Consider that there are approximately 700,000 retirement plans filing a 5500, but this number is dwarfed by the 40+ million homes that hold an IRA. In other words, there are approximately 60 times more IRAs than retirement plans, so it is safe to assume there are more FAs handling IRAs than retirement plans. In short, we will see a drastic increase in the number of fiduciary advisors in the market.

In addition, based on our own internal survey, IRA assets held by a Broker-Dealer (B-D) range between 40 and 80% of B-D total assets. However, many of these FAs know very little about ERISA fiduciary standard of conduct. This lack of knowledge increases B-D litigation risk as tens of thousands of misguided fiduciary missiles seek to secure new engagements or service existing clients. B-Ds will have to establish new training protocols in conjunction with compliance oversight to mitigate this risk. More on training to follow in our next blog.

Keep in mind that many of the FAs that handle IRA assets have historically avoided the retirement plan market place altogether; however, if they want to continue working and building their IRA practice they now have they have no choice but to become familiar with and adopt the ERISA fiduciary standards and obligations into their practice. As a result, we will likely see a drastic increase in FAs and Insurance Agents taking the Series 65, and I would not be surprised to see testing centers unable to accommodate FA’s date requests the longer the FA procrastinates. My advice, order the Series 65 study materials now and take the test ASAP.

After the Series 65 is passed, FAs will have to secure Fiduciary Errors & Omissions (E&O) coverage. Trust me, your competitors that live and breathe ERISA will be sure to tell your clients (their prospects) they should not deal with anyone that does not have Fiduciary E&O. Of course, this is an added cost of doing business that has not been necessary in the past for most FAs. Small B-Ds that have prohibited their registered reps from using the “f” word will find this cost difficult to swallow, whereas many of the larger B-Ds have turned this cost area into a profit center due to their bulk buying power. I suspect between this cost and the technology costs necessary to monitor the FAs business subject to the new DOL Fiduciary rule, many small B-Ds will give consideration to a merger or acquisition.

Once the FA has secured the Series 65, consideration should be given to the FA’s business model. Whether an FA decides to adopt a fee-based business model or continue exclusively in a commission-based, new agreements, contracts, policies, procedures, and website disclosures will need to be created. The cost for ERISA legal counsel to draft these documents after gathering an understanding of the business model will be a new cost for the FA, their B-D and/ RIA. Small independent RIAs will bear the full brunt of this cost whereas much larger organizations may be able to secure these documents as part of normal overhead. Either way, these new documents and disclosures represent more work and cost.

Regarding the business model, an FA currently in a solicitor arrangement will need to update their contract with the client to reflect their fiduciary status. This represents additional work and client education, but, more importantly, it changes the dynamic of the FA’s relationship with the RIA they referred. First, the FA will need to address their responsibility to monitor the RIA. Remember, recommending an RIA to a retirement investor is a fiduciary act. As a fiduciary act you must monitor the RIA to ensure they continue to meet the client’s needs and objectives. So, there is more work and risk to the FA for no additional pay. Second, since the FA is a fiduciary, the recommendation to use an RIA could be challenged as a prohibited transaction. You may recall, a fiduciary cannot use its position to increase its compensation. This is found under 29 C.F.R. 2550.408b-2(e)(1) which states:

“Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary(or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service. Nor may a fiduciary use such authority, control, or responsibility to cause a plan to enter into a transaction involving plan assets whereby such fiduciary (or a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) will receive consideration from a third party in connection with such transaction.[Emphasis added.]

I suspect this is more of a concern for the FA that provides no service other than a referral, than for the FA that was engaged to provide non-fiduciary services. However, every financial institution will need to consult with their legal counsel to determine the extent to which this issue presents a fiduciary risk.

As you can see there are numerous issues that both the Financial Institution and the FA will need to address. I am sure that some FAs will choose to leave the industry, but it seems hard to fathom a smaller number of marketing RIAs in the future. Those that choose to stay engaged will need to change their business model to align with the new DOL Fiduciary Rule. It will cost more, there will be more work, more risk, and no additional pay at this point. FAs that have never provided an investment review to monitor the investments will need to do so in the future to justify their compensation especially on complex products. Of course, there is plenty of opportunity but even the optimistic FA will need to temper their enthusiasm with a large dose of pragmatism.

As printed in the eMoney Blog.

Education Isn’t a Best Practice It Is A Requirement

Expect to see more articles on the subject of Fiduciary Education in the months to come e.g., (Investment News) and do not be surprised to see the following Department of Labor (DOL) position on training from the preamble quoted in those articles:

In particular, Financial Institutions must ensure that Advisers are provided with information and training to fully understand all investment products being sold, and must similarly ensure that customers are fully advised of the risks.” 

While we await the DOL’s response to many questions, a plain reading of the statement above implies a new fiduciary standard of product expertise, not previously expected of advisers in the past, has been established. Although adviser success has historically been measured by who they know, it now appears that adviser success will be based on what they know especially if fiduciary risk mitigation is an adviser priority.

More specifically, does the adviser fully understand the risk associated with the recommendation and has the adviser fully educated the investor of all risks so s/he can make an informed decision? Furthermore, is the adviser educated on the role a recommendation might fill under an ERISA standard of care? In other words, the adviser not only needs to be educated about the products they recommend but also why the products recommended are prudent and meet the best interest standard of care.

With less than 7 months before April 10, 2017, effective date, product manufacturers are under the gun to provide the necessary product education to their distribution channels. Smart compliance officers will demand documentation to support a claim their adviser has been adequately trained on each product they sell before permitting an adviser to sell that product after April 10, 2017. I also foresee a compliance officer prohibiting any adviser from selling products without documented proof they have been properly trained to mitigate litigation risk. Unfortunately, it is impossible for a product manufacturer to train all the advisers they have agreements with by April 10, 2017, if the education is delivered face to face. To reach all advisers that have or may sell your products you must establish an online Learning Management System (LMS) deliverable.

In other words, training must be web-based, on-demand, and gamified. Training tracks should include multiple modules that are content-rich. Between the education and the test, it should take no more than 15 minutes per module. Upon completing each module and successfully passing the test the adviser should be given a certificate of completion with a compliance officer access to pull reports that track adviser activity. Content must not only cover the product comprehensively, it must also address ERISA nuances especially fiduciary duties. ERISA training should be provided by a law firm since plaintiff attorneys tend to hold training from the peers in higher regard than ERISA laypeople. In short, training provided by an attorney on ERISA statutes, regulations, and judicial decisions is a strategy that maximizes risk mitigation.  However, product modules should be prepared by the product manufacturer to avoid liability for education that cannot be controlled by a party outside of the product manufacturer.

FRA PlanTools and Wagner Law Group have partnered together to provide a low-cost solution that can be provided for free to advisers if structured properly.

To learn more about this solution visit For more information, contact David Witz at 704-564-0482 or

Additional Thoughts on the Latest Tussey v. ABB Decision: Fiduciary Lessons Aplenty

As we covered in our last post, the district court’s latest decision in Tussey v. ABB found ABB breached their fiduciary duties but imposed no monetary damages on a procedural technicality. The moral victory for the plaintiffs, however, can still prove to be instructive for other fiduciaries responsible for the selection and monitoring of plan investments. Based on this case, past case law, as well as Department of Labor publications including the most recently issued Field Assistance Bulletin 2015-02, there are six basic obligations a fiduciary must consider when selecting and monitoring investments including:

  1. Engage in an objective, thorough and analytical search,
  2. Avoid self-dealing, conflicts of interest, or other improper influence,
  3. Consider the risk associated with the investment versus alternatives,
  4. Consider ALL costs in relationship to services provided,
  5. Ensure the investment is diversified to minimize the risk of large losses, and
  6. Consult with experts when that expertise is lacking.

Not adhering to this six step process, ultimately resulted in a finding of a breach. According to the court, “ABB’s inconsistent explanations for removing the Wellington Fund and mapping its assets to Fidelity Freedom Funds, the fact that ABB took a substantial part of the PRISM Plan’s assets and put them in an investment that was so new that ABB needed to make an exception to the IPS, and Fidelity’s explicit offer to give ABB a better deal if the Wellington assets were mapped into the Fidelity Freedom Funds” were all reasons cited for the court’s conclusion that ABB was conflicted when it chose to replace Wellington with Fidelity Freedom Funds. Had ABB adhered to the six step process, the outcome would likely have been different because documentation showing compliance with ERISA’s fiduciary duties would have been in place to exonerate ABB.

So what is the lesson here for other ERISA fiduciaries? If you are faced with the opportunity to reduce costs by using proprietary investments, consider documenting your reasons to adopt proprietary funds by answering the following questions:

  1. Are we using proprietary funds?
  2. Are we replacing an existing fund with a proprietary fund?
  3. Have we selected proprietary funds based on the standards and criteria established in the IPS?
  4. If an exception is necessary to use a proprietary fund, should we change the IPS standards and criteria permanently?
  5. Are we using a proprietary fund because it is in the best interests of participants or because it reduces the cost to the Plan Sponsor?
  6. How are we accounting for any additional revenue sharing from the use of the proprietary funds?

It is worth noting that case law has not prohibited the use of proprietary funds, the collection of revenue sharing, or the payment of plan expenses from plan assets. However, fiduciaries must understand that the use of proprietary funds creates an opportunity for additional liability issues to arise that must carefully and deliberately be addressed.

Plaintiffs Fail to Float Claim Past District Court

The U.S. District Court for the District of Massachusetts in In re Fidelity ERISA Float Litigation, No. 13-10222, 2015 WL 1061497 (D. Mass. March 11, 2015) has determined that float income is not a plan asset. This may be the last we hear about ERISA claims involving float targeting Fidelity, or any other service provider, as the defendant. Nonetheless, this case is just another example of why retirement practitioners should keep a close watch on case law that impacts fiduciary governance obligations. Unless Congress legislates new law, the Department of Labor (“DOL”) addresses the question raised by the courts, or the losing plaintiffs appeal to a higher court, it is looking like in most circumstances, float earnings are not considered plan assets.

As early as September 13, 1993 the DOL issued an Advisory Opinion addressing the collection of interest earning on assets in transit, be it contributions not invested, or distributions not cashed. This Advisory Opinion was followed by an August 1994 Information Letter and finally a Field Assistant Bulletin issued on November 5, 2002. Collectively, these three DOL publications have influenced the governance activities of knowledgeable fiduciaries by encouraging open negotiation between covered service provider and plan sponsor as to the retention of float income to avoid a prohibited transaction claim. But by determining that float income is not a plan asset; the court in In re Fidelity ERISA Float Litigation found that retention of float income is not a prohibited transaction. The Court referenced three other circuit court decisions which all held float was not a plan asset.

At this point, a fiduciary must now determine whether it is important to continue the same governance activities of the past or abandon those activities as a waste of time. Of course, under the current short-term interest rate environment float earnings do not amount to much especially for small plans, so the question is where do we go from here?

It is very important to realize that the point of this lawsuit was to go after the service providers like Fidelity where the damages across all plans could be done collectively in one case. Now that this method appears to not be viable, the remaining avenue is to go after the plan fiduciaries themselves. Although these cases are finding that float is not a plan asset, none have held that it is not a form of indirect compensation that must be considered by a prudent fiduciary under their 408(b)(2) responsibilities.

Practically then what does this mean?  Float negotiations are still important because they involve compensation paid to service providers, but will be reserved to those plans with the most assets where the amount generated is the greatest. One thing to keep in mind. If, in fact, we see a rising interest rate environment, float income will increase and become a more meaningful profit source for a covered service provider. If and when that happens, the group of plans that must take into consideration negotiations over float will necessarily increase.