Annual Retrospective Review – What does it Mean for Advisors?

  

Annual Retrospective Review - What Does it Mean for Advisors?

The DOL’s Prohibited Transaction Exemption (PTE) 2020-02 (Improving Investment Advice for Worker’s & Retirees) gives registered investment Advisors and their representatives the ability to receive compensation when providing investment advice to ERISA retirement plans, participants, and IRA owners. AdvisorAssist has previously provided guidance on the requirements of PTE 2020-02 in the corresponding blog post, but this post elaborates on the regulatory requirement for Investment Advisors regarding the Annual Retrospective Review. As a reminder, Advisors must conduct an Annual Retrospective Review and record their findings in a written report within six (6) months after the end of the year, or by June 30th.

The DOL has published FAQs, which provide additional guidance regarding an Advisor’s requirement to perform an Annual Retrospective Review of their covered recommendations in Question 19. Defined, the Annual Retrospective Review is a review that must be reasonably designed to assist the Investment Advisor in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the Advisor’s policies and procedures. Whichever methodology the Advisor chooses for their review, and its applicable results, must be reduced to a written report. This written report can either be provided to a Senior Executive Officer of the firm, or as circumstances require, created by the Senior Executive Officer in cases of smaller sized firms.. The officer required to certify the report will be attesting that they have reviewed the report in its entirety, inclusive of any violations, and that the Advisor has policies and procedures in place prudently design to achieve compliance with the exemption. Investment Advisors are required to retain the report, certification, and applicable supporting data for a period of six years along with the ability to produce these documents to the DOL within ten business days if requested.

When Investment Advisors are reviewing, assessing, and documenting the Firm’s overall control environment in regards to PTE 2020-02 and the Impartial Conduct Standards, they should review their current control framework by asking such questions as:

• Does the Advisor have a prudent process to modify current policies and procedures as business, regulatory and legislative changes and events dictate?
• Does the Advisor have the ability to test the effectiveness of the policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with the conditions of this exemption?
• When reviewing Advisor’s current internal work flows, do they align with what is currently published in written manuals?
• Does the Advisor have policies and procedures which ensure compliance with the Impartial Conduct Standards including:
• How an Advisor investigates and evaluates investments, provides advice, and the requirement to act prudently in their recommendations?
• That an Advisor acts with loyalty when making recommendations and never places their own interest ahead of the client?
• That an Advisor charges no more than reasonable compensation and complies with federal best execution laws?
• That an Advisor can not make misleading statements about investment transactions, or related data points, to entice clients into transactions?
• Has the Advisor mitigated any conflicts of interest that may affect them, and adequately documented how those conflicts are mitigated?
• Does the Advisor provide applicable written acknowledgments of the firm's ERISA fiduciary status?
• Does the Advisor have a process in place to identify all covered transactions during the review timeframe, and furthermore delineate those results into solicited transactions versus client-initiated transactions?
• For any client-directed rollovers, does the firm provide clients with a separate and distinct acknowledgment form where the client attested that the firm did not solicit the rollover?
• How is the Advisor tracking document and disclosure delivery, and can the Advisor prove all applicable documents and disclosures were delivered when required?
• Does each solicited transaction document the specific reasons for recommendations made to retirement clients, applicable due diligence conducted, costs associated, and whether the recommendation was in the client’s best interest?

PTE 2020-02 does contain the ability for Investment Advisors to correct certain violations within 90 days after the Investment Advisor learns, or reasonably should have learned, of the violation. Assuming the violation did not cause investment losses to the retirement client, and/or the Investment Advisor has made the client whole, the firm needs to notify the Department within 30 days, and the violation and correction must be specifically set forth in the written report of the retrospective review. Although not an exhaustive list, certain examples of violations could be:

• A transaction that inherently violates the Impartial Conduct Standards, and does not align to the fiduciary standards placed on representatives.
• Not having adequate policies and procedures to comply with all components of PTE 2020-02 or an update mechanism to enhance for any corresponding internal or external change required such as new business lines, enhanced regulations, etc.
• Not disclosing material conflicts and/or not providing required documentation and disclosures to the client during the transaction process which could have a material impact on their decision making such as:
• Not providing a comparable review of the costs associated with the current plan versus the proposed investment solution such as internal expense ratios, advisory fees, custodial fees, commissions, etc.
• Not providing a comparable review of the account characteristics of the current plan versus the proposed investment solution i.e legal protections, surrender timeframes, loan applicability, and/or tax ramifications.
• Not providing a comparable review of the characteristics of the current plan’s investment options versus the proposed investment solution such as product type availability or, share class availability.

With the results of the Retrospective Review in hand, Investment Advisors can find more effective ways to ensure their representatives are providing investment advice that aligns to the Impartial Conduct Standards, and strengthen the firm’s policies and procedures. AdvisorAssist Consultants are here and ready to assist Adviser’s in any compliance capacity needed. Should you have questions, please don’t hesitate to reach out today.

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5th Circuit Court Vacates DOL Rule

On March 15, 2018, the Fifth Circuit Court of Appeals ruled via split decision to “vacate” the well-publicized DOL fiduciary rule. This decision does not come as much surprise. It has long been rumored that the DOL rule was destined for failure after President Trump ordered a formal review in March 2017. Speculation by industry watchers is that the next step for the DOL rule could be the U.S. Supreme Court.

While this decision is limited in scope, it creates an opportunity for the Securities and Exchange Commission (“SEC”) to take the lead on a uniform fiduciary standard for both RIAs and broker-dealers. The SEC is the more natural choice for marrying the fiduciary standard across both RIAs and broker-dealers.

We expect the SEC to prioritize a new fiduciary rule proposal. Although the timing is uncertain, we expect to learn more prior to 2019.

What does this mean for you?

With or without the DOL, you still have a fiduciary responsibility to act in the best interest of your clients. You may not have to go to the extent of best interest contracts. However, “Know Your Clients” requirements are never going away and the regulators will always want documentation of how you operate as a fiduciary. It may still make sense to adopt some of the documentation standards of the DOL’s “Level Fee Fiduciary” when making rollover recommendations.

Contributors:

Brian Young
Brendan Furey

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DOL Rule: Level Fee Fiduciary

Even if you are a fee only RIA, the DOL still applies to you!

Unless you have been living under a rock, you are already aware that June 9, 2017 marked the official compliance effective date of the DOL Rule. Although advisors have until January 1, 2018 to be in full compliance of the new rule, it is recommended that you get started today.

I have been asked multiple times about the applicability of the DOL rule to a fee only RIA. Just because you do not collect commissions via mutual fund or insurance sales does not mean that you are safe from the DOL rule. Yes, as a fee only RIA, you are in good shape because you are already held to a fiduciary standard under the Advisers Act. However, the DOL rule expands the definition of a “fiduciary” as it relates to retirement plans and accounts. The most common scenario is when an Advisor recommends a retirement account rollover. In a rollover situation, there are additional disclosures and documentation practices that Advisors will need to implement to comply with the DOL rule. As it relates to fee based RIAs, I will focus my conversation on the level fee fiduciary exemption.

So who is a level fee fiduciary? Per the DOL rule, it is an advisor that provides services based on an AUM or fixed fee that does not vary based on the recommended investments. I think most people would agree that a fee based account versus a commission based account better aligns the interests between the Advisor and client. However, the DOL rule seeks to cover the conflict of interest that potentially lies in the rollover of a retirement account. More specifically, the scenario where the Advisor is able to generate revenue that they would not receive if not for the account rollover. Here are a couple scenarios to consider:

Scenario 1:

Your client has an ERISA retirement plan account through their employer, XYZ Corp. They are making a career change and starting a new job with ABC Corp. They reached out to you to help decide what they should do with their XYZ Corp sponsored retirement account. You recommend that the client should rollover their retirement plan account into an IRA account.

Scenario 2:

Your client has an IRA account that is held in a commission based account. You recommend that they rollover this account into a fee based account.

In these scenarios, here are a few best practices to make sure that you adhere to the level fee fiduciary exemption. You will need to:

• Acknowledge your fiduciary status through a written notice to your client.
• Abide by the impartial conduct standards:
• Act in the best interest of the client.
• Charge reasonable compensation.
• Do not make misleading statements.

In both account rollover scenarios, it is important that you also document how you are adhering to the impartial conduct standards. Here are few questions that you should answer and keep saved in your client files:

• Why was the account rollover recommendation in the best interest of the client?
• What other investment options are available to the client besides an account rollover?
• What are the fees and expenses in the previous account versus the fee based account?
• What are the level of services or investments made available under the previous account versus the fee based account?

If you have any additional questions, please feel free to post a comment below or send an email to info@advisorassist.com. We will be posting more content in regards to the DOL Rule, so please subscribe to our blog!

Contributors:
Brian Young

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