Looking to stay head of regulators who are more closely eyeing retirement accounts, LPL Financial told its brokers last month that next year they will no longer be able to receive a fee or commission from those accounts belonging to direct family members.
Brokers will have until Jan. 1 to hand off the accounts to another colleague or they will have to set the fee to zero and rebate any commissions, according to Brett Weinberg, a spokesman for the firm. The rule applies to the “lineal family line,” meaning parents, grandparents, children, children-in-law and grandchildren and affects individual retirement accounts, 401(k)s and other employer-sponsored retirement plans, he said.
LPL told its brokers in a notice last month that the move was being made proactively to get ahead of what it perceives as increased enforcement of the Employee Retirement Income Security Act of 1974 and rules around compensation on family accounts, according to Garrett Andrew Ahrens, founder of Ahrens Investment Partners and an LPL affiliate.
“There's going to be a lot more ERISA regulation,” he said. “There's a lot more in the pipeline, and I think LPL is just preparing for it.”
Receiving fees and commissions from a family member's account is considered a prohibited transaction under ERISA rules guarding against self-dealing, but regulators have not been enforcing the rule, according to Ed Slott, an IRA expert at Ed Slott and Co. If it were enforced, the rule could result in millions of retirement accounts losing their tax-exempt status, he said.
"Nothing has really been done about it because it would affect the whole industry," Mr. Slott said. "It would be hard to find anyone who manages retirement money who doesn't have a relative as a client ...That's usually where they get their clients from when they start out."
The reaction among brokers was that the rule was a positive change and would help eliminate potential conflicts of interest.
“LPL Financial and other broker-dealers are trying to be more proactive to execute proper policies and procedures according to [Labor Deparment] and ERISA guidelines to stay ahead of the curve,” said Jon W. Ulin, founder of Ulin & Co. Wealth Management and an LPL affiliate.
Mr. Ahrens added that there were other ways that advisers could be compensated on the accounts legally under the rule. It would have to involve payments coming from the plan sponsor directly in an hourly or flat fee for consultation, for example, or somewhere else where the fee did not come from the plan assets.
“I think it's a good rule, just one of the things that you need to work around to prevent future problems,” Mr. Ahrens said. “You can do away with the conflict of interest and there's other ways to” still receive compensation.
Mr. Slott said that LPL was the only broker-dealer he had heard of to institute the policy.
"It's a unique step," he said. "But the step really should come from the regulatory bodies" in terms of creating some kind of exemption.
Spokesmen at Raymond James Financial Inc., Ameriprise Financial Inc. and Commonwealth Financial Network were not immediately able to provide information about their policies on retirement accounts.
Mr. Ahrens said that LPL officials may be looking to move first because it has become more sensitive to possible compliance issues.
“Their No. 1 priority is to clean up their compliance track record,” he said. “They're committed to righting the ship, so I think they're being very thoughtful.”
LPL Financial has been hit with a series of fines over the past few years, including an
$11.7 million fine in May. The Financial Industry Regulatory Authority Inc. said in one enforcement action that the issues were due to the firm's inability to keep up with its own rapid growth.
