In the financial world, recent changes in the Department of Labor (DOL) made to the fiduciary standard have been all the buzz. It will change, and has changed, how companies approach managing assets and the overall use of individual retirement accounts (IRAs). It is forcing some brokers to re-think how they manage their practice. Some are converting to the register investment advisor (RIA) model versus the traditional broker/dealer model in an effort to provide a consistent fiduciary standard for all clients across all the client’s accounts. While the financial industry is figuring it out, there are implications for attorneys too. If attorneys want to avoid being labeled a “fiduciary,” then it will take working closer with advisors to maximize the benefits of IRAs to the end client.
Estate planning attorneys weren’t likely to be considered fiduciaries under previous ERISA rules. ERISA describes three ways in which a person might be considered a fiduciary. This article focuses on just one of those ways – providing investment advice. For an estate planning attorney to be held to the legal requirements of ERISA’s fiduciary standards, with respect to his advice regarding an IRA or 401(k) plan, the advice must qualify as investment advice. In 1975, the DOL issued a definition of “investment advice” under ERISA Section 3(21), which included a five-part test. Under the 1975 definition of investment advice, estate planning recommendations were unlikely to trigger the ERISA fiduciary standard, as estate planning advice typically wasn’t related to the investing, purchasing or selling of securities or other property, nor was it delivered on a regular basis to the client. But that has changed.
In the department’s view, in the final rule defining investment advice, it makes it clear that attorneys would not be treated as investment advice fiduciaries because they give such professional assistance in connection with a particular investment transaction.” However, the DOL went further to state that, [W]hen these professionals act outside their normal roles and recommend specific investments in connection with particular investment transactions, or otherwise engage in the provision of fiduciary investment advice as defined under the final rule, … they [would] be subject to the fiduciary definition.
Let’s run down some ways that attorney’s can avoid the expanded rule and utilize advisors to manage the client’s expectations:
Tax Ramifications: Attorneys need to steer clear of giving investment advice and limit it to the lax and legal ramifications of a transaction. Let the advisor work with the client on whether or not the transaction is the best financial move.
Retirement Distributions: The expanded rule discusses that advice on distributions may be considered investment advice. Minimize the advice given on who the IRA recipients should be; this is a great way to work with an advisor to make sure the beneficiary has its beneficiaries listed in a manner that works best with one’s financial goals/plan.
Required Minimum Distributions: An attorney will be labeled a fiduciary if it helps a beneficiary choose where to take a required minimum distribution (RMD). Directing beneficiaries to distribute from specific IRAs to satisfy the RMD would be construed as investment advice. This is an area where systems and available Monte Carlo software to advisors can help with choices. They can, for example, direct to pull the entire RMD pulling from an IRA with bonds in a raising rate environment, and model it to show them the long-term effects of that decision.
Conversion to a ROTH IRA: Any conversion is deemed advice. Just like with RMDs, this can easily be modeled for the client, and doing so will allow the advisor to not only model it, but have the paperwork ready to sign in order to execute the conversion if deemed appropriate.
Medical Expense Spend Down: Helping a client reduce assets in an IRA to qualify for Medicaid would constitute advice. Much like the two issues above, advisors have software to model the pros and cons of using this strategy.
In reality, as an attorney, you may be required to give advice in one of these areas in order to address all the issues that may arise with handling the estate planning for a client. Make sure your insurance covers you for ERISA violations, as this expanded definition could increase the liability associated with the profession. Working with a registered investment advisor, who is required to act as a fiduciary, can not only free up time, but liability.
This article is for informational purposes only and does not constitute tax, legal, insurance or investment advice. This article should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products. Travis S. Anderson