by Mark Mensack
While there are many independent professional advisors to whom a plan sponsor can delegate fiduciary responsibility, and therefore potential fiduciary liability, there are many more non-fiduciary service providers marketing themselves and their salespeople as independent experts. These “Phantom Fiduciaries” walk the walk and talk the talk, but in the fine print of their contracts they disavow themselves of any true fiduciary responsibility thus leaving the trusting plan sponsor on the fiduciary hook. More on Phantom Fiduciaries and their tricks at “Retirement Plans, The Wizard of Oz & You.”
In order to distinguish the wheat from the chaff, here are some topics for discussion with a potential advisor:
Are you a registered representative (aka. financial advisor/consultant, representative, agent, broker, account executive, wealth manager, or full-service investment advisor) or a Registered Investment Advisor?
By law, registered representatives are held to the “Suitability Standard” while Registered Investment Advisors (RIA’s) are held to the “Fiduciary Standard.” The suitability standard is akin to non-malfeasance and might be restated as the “do no harm” standard. A registered representative has no obligation to place your interests above his own. The fiduciary standard is akin to beneficence and might be restated as the “do good” standard. For a registered representative to violate the Suitability Standard, he must proactively harm you. An RIA violates the Fiduciary Standard if he fails to put your best interests ahead of his own!
By virtue of their employment contract, registered representatives have an obligation of loyalty to their broker-dealer. By law, an RIA has an obligation of loyalty to his client.
Given an array of 401k products, a registered representative can choose to sell you just about any product, even if this product will prevent you from fulfilling your fiduciary duty (via fiduciary paradox); for example: the product that makes the salesperson a bigger commission; the product his firm is pushing that week; or proprietary products which make his firm more money. Some broker-dealers market themselves as independent and unbiased, while only offering to their clients & prospects those products that “pay to play” or provide “kickbacks,” and do not permit their representatives to sell products that refuse to participate in such schemes.
Under ERISA Section 409, fiduciary responsibility carries a personal liability. As a 401k plan sponsor you have potential personal liability, if you fail to fulfill your fiduciary duties. Is it more prudent to seek advice from a salesperson, whose loyalty by virtue of their employment contract is to his or her broker dealer and whose responsibility to you is limited to the “Suitability Rule”; or is it more prudent to seek advice from an Independent Fiduciary, who either shares or assumes your fiduciary risk as an ERISA 3(38) Fiduciary, and who by law and by contract, is loyal ONLY to you and your participants?
In no way am I disparaging all broker-dealers, nor all registered representatives. Nor does it imply that all RIA’s are flawless. However, the fact is that registered representatives and their broker-dealers are in the business of selling products and the law governing them is designed as such. Registered Investment Advisors are in the business of providing advice for a fee, and the laws governing them are designed as such. More importantly, the laws governing fiduciaries, including Independent Fiduciaries who assume ERISA 3(38) status are among the “highest known to the law.” Brussian v. RJR Nabisco, 5th Circuit Court, 2000
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