Point to Ponder: A Reverse BICE Cause of Action?

In talking with some of my colleagues on both the legal and financial planing sides, an interesting question has come up with regard to potential liability under the new BICE provision of the DOL’s new fiduciary standard. I’m writing this short post to throw it out in hopes of getting some “think tank” responses.

This source for the current discussion is this recent article in InvestmentNews http://www.investmentnews.com/article/20160908/FREE/160909948/dol-fiduciary-rule-could-cause-half-of-potential-ira-rollover-assets?utm_content=buffer1445d&utm_medium=social&utm_source=linkedin.com&utm_campaign=buffer.

The article discusses the concern among some financial services individuals regarding advising potential clients on IRA accounts and potential 401(k) rollovers into an IRAs. The article suggests that the potential liability concerns among financial advisers may result in a lack of advice for employees, resulting in some employees just leaving their money in their company’s 401(k) once they retire.

Is it possible that financial advisers should also consider the possibility of a reverse BICE action against them as a result of advising a customer to stay in their 401(k) plan? Given the numerous legal actions against 401(k) plans and the adverse decisions and settlements against such plans, a strong argument can be made that there are a number of plans that are not in the best interests of the plan’s participants, increasing the possibility of unnecessary financial losses.

Under BICE, a financial adviser has a fiduciary duty to determine whether they can provide advice and recommendations that are in the best interests of the customer, that are an improvement from the customer simply leaving their money in their company’s 401(k) plan. This obviously requires a financial adviser to analyze the customer’s 401(k) in order to determine if they can improve the customer’s situation. While a financial adviser cannot make a customer choose a particular course of action, does a financial adviser have a fiduciary duty to point out a poorly structured 401(k) plan and the resulting potential for losses due to funds with excessive fees and/or a history of poor performance?

Once the parties enter into a BICE agreement, there is no question that a fiduciary relationship exists. The question is exactly what fiduciary duties are required under the BICE agreement. Clearly the anticipated duties involve recommendations of possible alternative investment products and/or strategies that better a customer’s situation. But if a financial adviser has additional information that is material and the customer would want to know in making their decision as whether to follow the adviser’s advice, does a financial adviser have a duty to disclose such information to a customer as well?

This is an interesting question, as existing fiduciary, agency and security law and decisions would seem to indicate that a strong argument could be made in favor of a duty to disclose such information. The first thought would be to draft the BICE agreement to expressly provide that the financial adviser does not have a duty to disclose such information. However, if such a fiduciary duty does exist under a BICE agreement, then the law would probably hold such an attempt to waive one’s fiduciary duties unenforceable given the judiciary’s strong position on fiduciary duties and protecting the public.

If a financial adviser does such a duty to disclose information and opinions regarding a customer’s company’s 401(k) plan, is there anything they can, or should do. to protect themselves from unwarranted liability in connection with providing services under a BICE agreement? At a minimum, I would document the fact that such information was provided, as well as the specific information that was provided. I would also have the customer acknowledge that the disclosure was made and sign the document.

I do not have a definite answer to this question. I’m hesitant to provide such advice and document same for several reasons. Any document becomes potential evidence if a claim is made. More importantly, based on my personal experience as a compliance director, not every financial adviser can properly determine whether an investment or investment strategy meet applicable suitability or prudence standards.

At this point, I have made my own personal decision as to what I am going to advise my clients to do. However, due to potential liability issues, I do not feel comfortable disclosing that decision here in case I am wrong. I have what I consider to be strong legal grounds for my position, but I cannot afford to have the LinkedIn world and my millions of loyal readers come after me if I am wrong. Mama didn’t raise no fool.

I look forward to your comments and insight on this matter.


About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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