By Tracey Longo | This article first appeared in the Financial Advisor magazine

The Department of Labor’s latest fiduciary rule proposal may be dead, but that doesn’t mean advisors can ignore compliance, experts warn.

Federal courts and the new leadership at the DOL may have wiped away the overhaul, but for wealth managers and advisors, the practical reality is unchanged: The compliance burden remains, panelists said during InvestorCOM’s webcast – “The New Reality of Rollover Advice.” 

Advisors today, they said, must operate within a dual framework: the 1975 five-part test for fiduciary status and Prohibited Transaction Exemption 2020-02. Layered on top of that is the SEC’s fiduciary duty and Regulation Best Interest standards. The result is a demanding regime with little room for error.

Fiduciary obligations did not vanish with the rulemaking, panelists noted. As employee benefits attorney Fred Reish told attendees, every rollover recommendation still implicates two core concepts: standard of care and conflicts of interest.

“There’s both a fiduciary rule and a conflict of interest rule in every regulatory scheme,” he said.

That means advisors must still demonstrate a prudent process. They must still manage conflicts. And they must still justify why a rollover is in a client’s best interest.

Even more important, many advisors are fiduciaries whether they realize it or not, panelists said.

If an advisor already serves a plan, manages participant accounts or exercise discretion, in those cases fiduciary status is automatic—and extends to rollover recommendations. One of the biggest traps in the current framework is the belief that one-time advice is safe. It often isn’t.

Under the revived five-part test, fiduciary status hinges in part on providing advice on a “regular basis.” But regulators are increasingly skeptical of attempts to carve out one-time rollover recommendations, Reish said.

“If you make a one-time recommendation … you’re not a fiduciary under ERISA,” he noted. “But that’s only if no ongoing relationship exists.”

That caveat means that if the rollover is the start of an advisory relationship, regulators may treat it as fiduciary advice retroactively.

Industry observers warn this “regular basis trap” is a growing enforcement focus.

Across regulators, one theme is consistent: Document everything. The SEC may not explicitly require rollover documentation in every case, but in practice, examiners expect it.

“If you don’t document, it didn’t exist,” said William Nelson, director of public policy and association general counsel at the Investment Adviser Association.

Generic language won’t cut it. “Boilerplate” justifications—more options, better service—are a red flag. Advisors must provide individualized analysis tied to the specific client.

That expectation is reinforced by recent SEC guidance that says firms must be able to show the following:

• Why the rollover was recommended.
• What alternatives were considered.
• How fees, services and investments compare.
• How the recommendation fits the client’s profile.

Many broker-dealers assume Regulation Best Interest offers a lighter-touch path. It doesn’t, experts warn.

Reg BI still requires advisors to act in the client’s best interest and consider alternatives. And increasingly, it requires mitigation—not just disclosure—of conflicts.

“Disclosure is not enough anymore,” Nelson said.

Meanwhile, Finra and the SEC continue to examine rollover recommendations aggressively, often through the lens of account-type recommendations.

For firms trying to navigate the dual framework, the answer is not guessing which rule applies. It’s building a defensible process and disclosure that works across all of them, panelists said.

Reish outlined a simple—but demanding—approach:

• Gather plan data: investments, services, costs.
• Compare to IRA alternatives.
• Analyze the client’s needs and profile.
• Document the decision.

“That process cuts across all these different regulatory bodies,” he said.