Different fiduciary roles bring different amounts of liability

While advisors share common standards for how they manage investment decisions, there are nuances to the amount of liability being assumed based on the type of fiduciary you are.

Starting at the broadest level, investment advisers who advise others in the buying and selling of securities are deemed to be fiduciaries under the Investment Advisers Act of 1940 (1940 Act) and are regulated by the SEC or individual states.  The 1940 Act and its associated rules provide guidance for advisors that can be exercised with or without assuming discretion.

For retirement plans, the scope of the advisor’s fiduciary duty is defined under ERISA based on the specific functions performed and the amount of discretion it exercises:

1. Limited-scope ERISA 3(21) fiduciary: Those who acknowledge a fiduciary role without taking discretion; they provide investment advice, but leave the ultimate decision to the plan sponsor.
2. ERISA 3(38) fiduciary: Those who select, monitor, and replace investment managers as appropriate; who have authority to buy and sell securities. This role is effectively the outsourcing of the role of hiring and firing the managers.
3. Full-scope 3(21) fiduciary: Those who take discretion for all fiduciary decisions including the selection, monitoring, and replacement of all other service providers, including the 3(38) fiduciary. Although this is rare, in this case the plan sponsor is only responsible for the prudent selection of the 3(21) fiduciary, who then takes over all other investment fiduciary duties of the plan sponsor.

Most retirement plan advisors are typically filling the limited-scope 3(21) fiduciary role, although many might not even realize that the differences exist. Probably the biggest question on most advisors’ minds is under what circumstances they should serve as the various types of fiduciary, how their processes should be structured accordingly, and how to differentiate their services in the marketplace.  Legal counsel should be consulted as you sort this out because your liability is commensurate with the scope of services provided.  More responsibility ensures more liability and should equate to more compensation.

Tomorrow, March 11th, we will be presenting a webinar on this subject in which we will go into greater depth in explaining how these types of fiduciary differ and what advisors can do to take greater advantage of their status.

UPDATE: The recording and slides from the webinar are now available at www.fi360.com/webinars. Look for follow up blog posts answering questions submitted during the presentation in the coming weeks, as well.

For further reading on the subject see:

• Scott Simon's Morningstar article "The Different Flavors of ERISA Fiduciary"
• Fred Reish's outline regarding fiduciary roles and the associated liability

Comments

[Ed Proulx]

The assumption that the process that results in restoration of faith in the financial markets involves trust between the advisor and the investor forgets about greed.

Trust is only an issue in the absence of greed.

Thankfully, we are in or entering into a period of time when only the absolutely most positive of thinkers will see opportunities so enthusiastically as to border on greed. But those times will come back.