LPL provides clarity on rule preventing hybrid RIAs from making 401(k) rollover recommendations as a broker

Prompted by the DOL fiduciary rule, LPL has told its hybrid advisers that in their capacity as brokers they cannot advise clients to roll over their funds into an IRA

Jun 26, 2017 @ 5:13 pm

By Greg Iacurci

Editor's note: An earlier version of this story indicated that LPL's memo represented a new policy when in fact it reinforced an existing policy.

LPL Financial, the largest independent broker-dealer in the U.S., is no longer allowing hybrid advisers to recommend rollovers to clients in a brokerage capacity, under a policy adopted in response to the Labor Department's fiduciary rule.

The firm has adopted an "education-only policy with respect to rollovers," meaning hybrid advisers may only have "general, educational conversations with investors and may also accept investor-directed rollovers," according to an internal adviser memo obtained by InvestmentNews.

LPL has had an education-only policy on rollovers for a few years. The memo provided clarity for hybrid advisers on how rollovers can be managed through their outside RIA to comply with the DOL fiduciary rule.

"LPL Financial advisers are prohibited from recommending that investors roll out of a [401k] plan. Instead, financial advisers may educate investors on the available options regarding their plan assets (e.g., take a distribution, leave assets in the plan, roll over to another plan with a new employer, or roll their assets into an IRA)," the memo stated.

Under the Department of Labor's fiduciary rule, which raises investment-advice standards in retirement accounts, providing education to investors on their distribution options from a retirement plan like a 401(k) doesn't constitute fiduciary advice. A recommendation to roll over, however, is a fiduciary act and comes with additional liability for brokers and their supervisory firms.

LPL, which houses 14,000 registered representatives, is allowing hybrid advisers to recommend rollovers "if you are limiting your recommendation to advisory services through your hybrid RIA firm," and follow certain conditions, according to the memo.

As the rule is currently written, operating under a level-fee advisory business model poses less risk to advisers and their supervisory firms than doing business on a commission basis.

"We have updated our policy in response to heightened regulatory concerns from Finra, the SEC and the DOL about sales practices around rollovers," said an LPL spokesman in a statement, when asked about the memo.

LPL's policy went into effect June 9 with the applicability date of the DOL fiduciary rule. LPL's memo was in response to specific questions hybrid advisers had about LPL's policy change.

The DOL rule's full implementation date is set for Jan. 1, 2018, barring any delays from the DOL under the Trump administration, which is currently reviewing the rule.

LPL, in its memo, said it will "take a fresh look at its rollover policies as the DOL rule is implemented across the industry."

"Specifically, we will watch the regulatory, litigation, and competitive environments. We will also monitor the policy as the industry innovates to provide technology and tools to better support rollover recommendations," the firm said.

Observers have said recommending rollovers from a 401(k) plan likely presents the greatest challenge for broker-dealers and their brokers under the fiduciary regulation.

Several large broker-dealers have been announcing changes to their respective retirement business models in light of the fiduciary regulation. As an example, brokerage firms such as Morgan Stanley and Merrill Lynch are mandating that certain non-specialized 401(k) advisers partner with specialized advisers to continue servicing 401(k) plan clients.

Others have trimmed the number of investments available on their investment platforms. Wells Fargo said recently it will restrict new mutual fund sales in retirement accounts to a particular share class known as a T share, and it would prohibit certain other investment purchases such as municipal bonds.

Earlier this month, LPL told advisers it was revamping its pricing of certain investment products such as fixed annuities and unit investment trusts in preparation for the DOL fiduciary rule.

LPL laid out certain conditions for advisers to recommend rollovers under an advisory business model through a hybrid RIA firm.

Those include: providing an attestation to LPL saying the hybrid RIA has reasonable policies and procedures to: comply with the rule and prohibited transaction exemptions; limit rollover advice to the advisory services provided by the hybrid RIA firm only; and make certain disclosures to investors. LPL must also provide written acknowledgement of the attestation form.


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