Experiential Wealth, Inc.
Experiential Wealth, Inc.
Experiential Wealth, Inc.


Conflicted Advice is an Oxymoron – A New Day for Retirement Investors

Mar 18, 2016 | Individuals, Institutions, Opinions, Plan Sponsors

So much has been said and fought over the U.S. Department of Labor’s (DOL) proposed expansion of fiduciary duty to advisers and their institutions since first proposed in 2010.  It has been an ongoing battle between the financial self-interest of the industry and the public good.  The practice of financial product sales professionals placing themselves in a position of trust to dispense conflicted advice should be stopped.  Sales professionals and the retail investors often confuse sales communication and infomercial as unbiased financial advice in the investor’s best interest.  The adviser is placed in a position of (knowledge) power and, if left unchecked, would become abusive.  Advice influencing decisions regarding rollover, paying off a mortgage or annuitizing a pension payout are great examples.

The industry (brokers, sales professionals and their institutions and associations) has pushed back on DOL’s effort to apply fiduciary status on all advisers compensated for offering investment advice to retirement plans and their participants and IRA owners.  The industry went so far as to suggest that “conflicted advice is better than no advice at all.”  According to the Oxford Dictionary, advice is defined as “guidance or recommendations concerning prudent future action, typically given by someone regarded as knowledgeable or authoritative”.  In the context of professional advice, most of us assume and expect that it is doled out in our best interest.  Images of parents advising their children, physicians advising their patients, or teachers advising their students often come to mind.  The foundation of advice is trust based on undivided loyalty and offered in the best interest of the receiver. The concept of “conflicted advice” is nothing shy of an oxymoron.  Frankly, it is insulting to the investing public.  The fact that conflicted advice given sometimes happens to be consistent with   fiduciary advice does not mean that conflicted advice is reliable or acceptable.

I maintain that not everyone should be an investment fiduciary.  Professional product sales serve an important function especially in complex environments.  However, tainting the fiduciary water with self-serving biases and conflicts is wrong and even more egregious is to ride on the back of a trust relationship for self-gain.  Many advisers did not start out to exploit a trust relationship but their deviation and conflicts are incrementally accumulated over time until they can no longer be objective about their own motivations.

When thinking about practicing the fiduciary standard one should remember the Golden Rule – “Do unto others as you would have them do unto you.”  At the end, to be a fiduciary is to do the “right” thing.

The DOL1  on April 20, 2015, proposed2 to redefine the term “fiduciary” under the Employee Retirement Income Security Act of 1974 (“ERISA”) in the context when individuals are offering retirement investment advice for compensation.  For the first time, the term fiduciary is applied to individual retirement account (“IRA”) or IRA owner and Health Savings Account (“HSA”) and HSA Owners3.The final rule is expected by April this year.

The purpose of this proposed rule is to increase consumer protection.ERISA safeguards retirement plan participants by imposing trust law standards of care and undivided loyalty on plan fiduciaries, and by holding fiduciaries accountable when they breach those obligations. In addition, fiduciaries to plans and IRAs are not permitted to engage in “prohibited transactions,” which pose special dangers to the security of retirement plans because of fiduciaries’ conflicts of interest with respect to such transactions. Under this regulatory structure, fiduciary status and responsibilities are central to protecting the public interest in the integrity of retirement.

DOL’s proposed fiduciary re-definition4

What is the purpose of this proposed rule?

The purpose is to better protect plans, participants, beneficiaries, and IRA owners. In the absence of fiduciary status, persons who provide investment advice would neither be subject to ERISA’s fiduciary standards, nor accountable under ERISA or the Internal Revenue Code (IRC) for imprudent, disloyal, or tainted advice, no matter how egregious the misconduct or how substantial the losses.

Who is a fiduciary5?

“Any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary.”

What is an investment Decision?

“Decisions can include, but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA.”

What does it mean for advice to be in the “Best Interest” of retirement investors?

“Investment advice is in the “Best Interest” of the Retirement Investor when the Adviser and Financial Institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the investment objectives, risk tolerance, financial circumstances and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution, any Affiliate, Related Entity, or other party.” This is an existing standard and not a new proposal.

Who is covered by the proposed rule?

“The fiduciary can be a broker, registered investment adviser, insurance agent, or other type of adviser (together referred to as “advisers” here). Some of these advisers are subject to federal securities laws and some are not.

Who does it mean to be a fiduciary?

“Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected.”

What is non-fiduciary advice6?

Currently, “non-fiduciary advisors may operate with conflicts of interest that they need not disclose and have limited liability under federal pension law for any harms resulting from the advice they provide. Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests.”

How are IRA owners disadvantaged currently?

Since IRA assets are not currently protected under ERISA fiduciary rule, IRA owners do not have a statutory right to bring suit against fiduciaries under ERISA for violation of the prohibited transaction rules and fiduciaries are not personally liable to IRA owners for the losses caused by their misconduct.

The Best Interest Contract Exemption for Retail Investors

ERISA7and the IRC8 prohibit a plan fiduciary to deal with the assets of the plan in his own interest or for his own account.Fiduciaries are prohibited from receiving payments from third parties and from acting on conflicts of interest, including using their authority to affect or increase their own compensation, in connection with transactions involving a plan or IRA. Certain types of fees and compensation common in the retail market, such as brokerage or insurance commissions, 12b-1 fees and revenue sharing payments, fall within these prohibitions when received by fiduciaries as a result of transactions involving advice to the plan participants and beneficiaries, IRA owners and small plan sponsors.

In order toaccommodatecurrent (commissions and other incentive compensation) business models for delivering investment advice under the fiduciary framework to retail investors, DOL proposes new exemptions from ERISA’s prohibited transaction rules that would broadly permit advisers 9 to continue common fee and compensation practices, as long as they are willing to adhere to basic standards aimed at ensuring that their advice is in the best interest of their customers.

The proposed Best Interest Contract Exemption10, would apply when prohibited compensation is received as a result of advice to retail “retirement investors” including plan participants and beneficiaries, IRA owners, and plan sponsors (or their employees, officers or directors) of plans with fewer than 100 participants making investment decisions on behalf of the plans and IRAs.

The exemption would require the adviser and financial institution to contractually:

  • acknowledge fiduciary status,
  • commit to adhere to basic standards of impartial conduct,
  • warrant that they have adopted policies and procedures reasonably designed to mitigate any harmful impact of  conflicts of interest,
  • disclose basic information on their conflicts of interest and on the cost of their advice,

The standards-based approach for fair dealing and fiduciary conduct would align the adviser’s interests with those of the retail investor:

  • to give advice that is in the customer’s best interest;
  • avoid misleading statements;
  • receive no more than reasonable compensation; and
  • Comply with applicable federal and state laws governing advice.

Chao & Company is an investment advisor offering independent fiduciary investment advice and management to retirement plans, endowments, foundations and tax exempt organizations.


  1. DOL-Final-Rule-2016-04.pdf
  2. 29 CFR Parts 2509 and 2510 http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28201
  3. Under the Proposed Rule – The term “IRA” has been inclusively defined to mean any account described in Code section 4975(e)(1)(B) through (F), such as a true individual retirement account described under Code section 408(a) and a health savings account described in section 223(d) of the Code.
  4. DOL Fact Sheet – Department of Labor proposes Rule to Address Conflicts of Interest in Retirement Advice, February 23, 2015. DOL-BICE.pdf
  5. Under the Proposed Rule – There appears to be a widespread belief among broker-dealers that they are not fiduciaries with respect to plans or IRAs because they do not hold themselves out as registered investment advisers, even though they often market their services as financial or retirement planners. The import of such disclaimers-and of the fine legal distinctions between brokers and registered investment advisers – is often completely lost on plan participants and IRA owners who receive investment advice.
  6. Many of the consultants and advisers who provide investment-related advice and recommendations receive compensation from the financial institutions whose investment products they recommend. This gives the consultants and advisers a strong bias, conscious or unconscious, to favor investments that provide them greater compensation rather than those that may be most appropriate for the participants. Unless they are fiduciaries, however, these consultants and advisers are free under ERISA and the Code, not only to receive such conflicted compensation, but also to act on their conflicts of interest to the detriment of their customers.
  7. https://www.law.cornell.edu/uscode/text/29/1106
  8. https://www.irs.gov/Retirement-Plans/Retirement-Plan-Investments-FAQs
  9. Both individual “advisers” and the “financial institutions” that employ or otherwise contract with them–and their affiliates and related entities that is provided in connection with the purchase, sale or holding of certain assets by plans and IRAs.
  10. http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=28202