Will DOL's Rule Lay an Accidental Fiduciary Trap?
DOL officials themselves note that experts would have to look at the “totality of facts and circumstances” to determine whether a person is someone who “either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis” and is making a recommendation “based on the particular needs or individual circumstances of the retirement investor… in the retirement investor’s best interest.”
The Cost of Ambiguity
Once regulations expose people to the possibility that a court or administrative law judge will have to look at the “totality of facts and circumstances” to free them from litigation, they are in the lawsuit bull’s-eye, because defending against even a baseless lawsuit is costly, time-consuming and frightening.
Kendra Isaacson, a representative for the Insurance Coalition, talks about the accidental investment advice fiduciary problem in one of the comments on the draft definition.
She gives the example of a call center representative who fields questions from individuals through a hotline.
One caller wants help with multiple individual retirement accounts and an employer-sponsored retirement plan. The call center rep wants to pass the caller who needs help to a more specialized representative.
“This is not investment advice, but it is a referral for such,” Isaacson writes. “Under the proposed rule, would that be considered fiduciary advice? Would the phone representative then be responsible for the advice that the representative to whom they referred the individual ultimately provides the individual since the phone representative helped facilitate such conversation? … Should the phone representative simply not refer the individual due to fear of triggering fiduciary status?”
John Carter, the president of Nationwide Financial Services, talks about the accidental fiduciary trap in another comment letter.
“Simple, yet critical, resources such as internal call centers, digital engagement tools, proactive participant communications and educational materials, and websites could be substantially curtailed, rendering them less effective, for fear of being deemed sources of fiduciary investment advice,” Carter warns.
Carters suggests that the proposed definition could make the problem of call center reps providing overly general, infuriating advice even worse.
If advice-providing companies were afraid of accidental fiduciary traps, “call center representatives for insurance companies, recordkeepers and broker-dealers would need to follow tightly controlled scripts when engaged by a plan participant or IRA owner,” Carter predicts. “The true impact of the proposal would be reducing these interactions to an exercise of sharing factual, bare minimum and one-dimensional information resulting in the retirement investor being left to either fend for themselves or take on additional cost to hire an investment advice provider for further assistance.”
Whether the accidental fiduciary fears are valid or not, they show the difficulty of writing rules flexible enough to catch clever crooks without catching financial professionals or others who sincerely believe that everyone should invest in wheat pennies and antique farm implements.
Credit: Chris Nicholls/ALM
