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Broker-Dealers and Other Non-Fiduciaries as Fiduciaries? (Part 2)

There's a solution for registered representatives.

W. Scott Simon, 11/05/2009

In September, I cited the white paper issued by the Obama Department of Treasury titled "Financial Regulatory Reform, a New Foundation: Rebuilding Financial Supervision and Regulation." It seeks, in part, to (1) subject broker-dealers providing investment advice to their clients to a fiduciary standard and (2) "harmonize" the regulation of broker-dealers and registered investment advisors by replacing the suitability standard that now governs broker-dealers with the fiduciary standard that now governs registered investment advisors. In short, the two-pronged goal is to turn broker-dealers into fiduciaries and then subject them to the same fiduciary standard that governs registered investment advisors when ongoing advice is given.

(Caveat: Even though the white paper isn't concerned with participants in qualified retirement plans (such as 401(k) plans) governed by the Employee Retirement Income Security Act of 1974, if Treasury's proposal is adopted it's likely that it will govern the conduct of broker-dealers in their relations with participants in these plans.)

I've contended a number of times over the years that B-Ds do not want to have anything to do with being fiduciaries. But what do the registered representatives of B-Ds think about this? No doubt many registered representatives wish to do right by their clients and, in fact, many of them believe that they already are fiduciaries to their clients (whether or not that's true legally).

The ultimate outcome of the great wrestling match among the executive and legislative branches of the federal government, and various powerful financial services interest groups as to whether broker-dealers will be turned into fiduciaries and, if so, what kind of fiduciary standard they will have to live up to is not yet known, of course. Given that, many of the registered representatives who believe that they already are fiduciaries to their clients cannot be blamed for perhaps feeling as though they're in a state of suspended animation. There are other registered representatives, of course, who wish to do right by their clients but don't believe that they're fiduciaries to them (they would be legally correct in most cases).

There is a way, however, for all registered representatives including (1) those who believe that they already are fiduciaries to their clients and those who have no such belief and (2) those who are already in--or are thinking of getting in--the qualified retirement plan market of 401(k) plans to not only increase their income but also incur no fiduciary risk. The key to this business model is not to focus at the plan level per se but on the many participants in a retirement plan.

The way to accomplish this is for a registered representative (through its B-D) to associate with a provider that offers a multiple employer plan (MEP). As discussed in this column in August, a MEP is the "platinum standard" of delegation for the sponsor of a qualified retirement plan because it allows the sponsor to offload all day-to-day fiduciary responsibility (and therefore all fiduciary liability) including that for the operations of the plan (i.e., administration) and the plan's assets (i.e., plan investment options) to an existing platform designed for the specific purpose of alleviating the burdens of fiduciary responsibility.

In considering the MEP scenario, a plan sponsor need make only one decision: whether to join the MEP or not to join it. If the sponsor decides to join the MEP, it then morphs, so to speak, into what could be termed a "participating employer" in the MEP. Once the plan sponsor joins the MEP, it has absolutely no duties, not even on-going duties to monitor vendors or investments. All duties would instead be borne by the provider that set up the MEP and by other fiduciaries appointed by the provider that are necessary in prudently managing the plan.

Where do registered representatives fit into all this? Well, B-Ds have a strong presence in the small retirement plan market. This market, which currently totals nearly $300 billion in assets, is comprised of plans with assets of between $1 and $10 million. Registered representatives who have significant experience in the small retirement plan market as well as those that have little experience but are eager to enter this market will find a MEP with a complete fiduciary governance platform to be the ideal vehicle.

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