Who oversees wealth advisers who guide investors on 401(k)s? It depends.

In the most complex scenarios, you may answer to DOL, Finra and SEC

Apr 1, 2015 @ 4:48 pm

By Darla Mercado

The financial services industry is trading plenty of barbs with regulators over fiduciary regulation, but a gray area could put advisers at risk: What about the adviser who guides wealth management clients on their 401(k)s?

It's likely an everyday scenario for many advisers who give clients advice based on the big picture of their finances. You could even say that pulling data on a prospective client's retirement plan is part and parcel of the financial planning process.

What is questionable, however, is whether the adviser is facing fiduciary liability based on how he or she uses that wealth management client's 401(k) information and provides suggestions on how to allocate it. What about taking a rollover out of the 401(k) plan after the client retires? Better yet, which regulators does the adviser answer to in this scenario? It may be as many as three.


Currently, the adviser's fiduciary liability in that sort of scenario is unclear. It's mostly a matter of facts and circumstances, according to Marcia Wagner, managing director at The Wagner Law Group.

“If the adviser doesn't have any discretionary authority or control, and the participant takes the advice, then it's up to the participant to effectuate that advice,” she said. The adviser could say he is providing this client with education on the plan, and thus rolling over that 401(k) with him shouldn't be a prohibited transaction.

On the other hand, someone could always argue that the participant who follows the wealth manager's suggestions on allocating the 401(k) could be rubberstamping the guidance. There, the fiduciary liability of the adviser could be arguable, Ms. Wagner said.

Brokerage windows, the accounts in which participants have free reign over how they can invest their 401(k) assets, can also prove problematic for advisers who get too involved.

“If the wealth adviser has discretionary control over the brokerage account, then he is a fiduciary,” Ms. Wagner said. “The differentiating issue is what kind of authority and control does the adviser have with respect to the participant's money. That's determinative of how they accept the money.”

An adviser with discretion over a client's retirement plan account is a fiduciary under the Employee Retirement Income Security Act of 1974. So a rollover out of that plan that results in variable compensation to the adviser will be a prohibited transaction — even if the adviser is working with the client in the context of wealth management, Ms. Wagner explained.


Advisers contending with the hypothetical wealth management client and his 401(k) assets could also find themselves in the crosshairs of not one or two, but three regulatory regimes.

Welcome to the world of dually-registered advisers who give wealth management clients guidance on their 401(k) brokerage windows.

Differences emerge between a self-directed brokerage account that a plan participant can establish at any broker-dealer and a plan that offers a brokerage window via an arrangement that's already been made with a custodian.

Advisers executing transactions in a brokerage window — even without discretion — are subject to supervision by their broker-dealer, as well as books-and-records rules under the Securities Exchange Act of 1934, according to Paul Tolley, chief compliance officer of Commonwealth Financial Network.

Finra Rule 3040, which governs private securities transactions, kicks in if the adviser is facilitating transactions at a brokerage window.

If the broker-dealer receives compensation directly or indirectly, then Finra's Rule 2111 over suitability applies, too.

Any of these arrangements done pursuant to an advisory contract with a wealth management client will subject the adviser to oversight from the SEC. And if an adviser takes discretion over 401(k) assets, even if the client is seeing him for wealth management services, then he is already subject to DOL regulation.

“It's so complicated,” Mr. Tolley said.

“In order to get to the end result, you need to get to what's the specific scenario for the adviser: Are you giving participant-level advice?” he added. “If you're providing participant-level advice for compensation, then you're subject to the DOL. If you have discretion, you're a 3(38) [ERISA] fiduciary. You're subject to Finra rules if there are securities transactions, and SEC rules if you do it as an investment adviser.”


Depending on where the SEC and DOL go with their respective fiduciary rule-making, things could change drastically.

“All of this turns on the fiduciary regulation,” Ms. Wagner said, referring to the DOL. “Will there be an exemption for the brokerage window? For those who give disclaimers on education? What will class exemptions look like?”

“This is all current law, and it may change significantly,” she said.


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