Regulators have a sharp eye on IRA rollovers, so advisers must act cautiously

Financial advisers should discuss the pros and cons of a move with clients, and document their considerations.

After the Department of Labor’s fiduciary rule for retirement advice was killed earlier this year, many brokers likely breathed a sigh of relief. Now things could return to normal, especially in regard to IRA rollovers, a lucrative part of many advisers’ businesses.

That hasn’t happened. While the Securities and Exchange Commission’s proposed rule for investment advice is not as stringent as the Department of Labor’s, it is still a work in progress and no one is really sure how rollovers will be addressed in the rule’s final form.

At the same time, both the SEC and the Financial Industry Regulatory Authority Inc. have made rollovers a top exam priority for the past several years. They want to make sure that advisers are being upfront with their clients and that if they are making a rollover recommendation, there are good, sound reasons that the client will benefit from doing so.

As a result of these factors, many firms are moving cautiously. They are either keeping in place some of the guidance they adopted when they thought they would have to comply with the DOL rule, or taking measures they think will make them compliant under a new SEC rule.

As Elizabeth Miller, president of Summit Place Financial, told senior reporter Mark Schoeff Jr. in this week’s cover story, “It’s this very gray area right now. You’re either doing what you’ve always done — ignoring that there may be any change to the rules — or you’re trying to adapt to the uncertainty by taking steps to ensure you’ll be covered whatever the rule change might be.”

Ms. Miller now requires clients rolling over a 401(k) account into an IRA to sign a four-page disclosure document that includes the acknowledgement that they will be charged a fee by her for advising on the new IRA account. This is critical since this is a new cost they didn’t incur in their old 401(k) accounts.

Fred Reish, a partner at the law firm of Drinker Biddle & Reath, goes so far as to suggest advisers who want to make sure they will be in compliance when the SEC advice rule is adopted may want to simply follow the old DOL rule when it comes to IRA rollovers.

Whether advisers go to that extreme or not, they should be aware that although the pause button has been pressed on IRA rollover rules, regulators are watching and advisers are vulnerable to discipline if they cross what is admittedly a murky line here.

At the very least, advisers and brokers should go through a process with their clients of explaining the pros and cons of IRA rollovers and, more importantly, have a signed document proving they have done so.

(More: One thing advisers get wrong on retirement plan rollovers)

When presented with detailed information on IRA rollovers, some clients will undoubtedly choose not to roll over their 401(k) funds, and advisers should be prepared for that eventuality. Advisers must understand that this is clients’ right and that, at the end of the day, these clients will respect their advice and appreciate their honesty.

As Mr. Schoeff points out in his story, the days of almost automatically executing a rollover for a client are gone. In most cases, there’s a lot more thought being put into that decision, and that’s a good thing.