When Making Rollover Recommendations, Is Educating Investors Enough?

When it comes to making best interest rollover recommendations, some financial professionals and their respective wealth management firms are evaluating whether an educational or an advice-based approach is needed to meet the Department of Labor’s (DOL) Prohibited Transaction Exemption (PTE) 2020-02 requirements.

For context, the DOL’s PTE 2020-02, “Improving Investment Advice for Workers & Retirees,” is a prohibited transaction exemption that permits wealth management firms and their financial professionals to receive compensation resulting from non-discretionary fiduciary investment advice to investors.

In 2005, the DOL’s direction on this issue was based on whether or not a financial professional was a fiduciary. This was known as the Deseret Opinion, which stated that if a financial professional was already a fiduciary to the plan and made a rollover recommendation, then the recommendation was considered to be fiduciary investment advice. If she was not already a fiduciary, then the recommendation was not fiduciary advice and could be considered education.

In 2020, the DOL withdrew the Deseret Opinion and has since stated that a financial professional can be considered to be giving advice even if they are not already a fiduciary. Subsequently, the DOL reinstated the five-part test for investment advice fiduciaries. The new interpretation is that a rollover recommendation would satisfy the “regular basis” part of the five-part test, and that if the other four parts are also satisfied, a financial professional would be considered a fiduciary for the rollover recommendation. In turn, the financial professional must engage in a prudent process to satisfy the terms of PTE 2020-02.

The Securities and Exchange Commission (SEC) also offers specific guidance for those looking to distinguish between investment education and advice. The SEC’s Regulation Best Interest Adopting Release (starting at footnote 179 on page 89), indicates specific types of communications that would fall within the realm of education, as well as the circumstances under which a communication would be deemed educational as opposed to a recommendation.

For more information about the SEC’s and DOL’s rollover requirements, we invite you to watch our on‑demand webinar, in which experts at Eversheds Sutherland provided detailed insights into how insurance carriers, broker-dealers and investment advisors can make compliant rollover recommendations. Topics of discussion include education versus advice, the DOL’s and SEC’s expectations about documentation and client disclosure, and evaluation criteria for making rollover recommendations.

If your firm is considering deploying a purpose-built solution to streamline and simplify the rollover recommendation, documentation and disclosure process, contact us to schedule a demo of RolloverAnalyzer.



Author:  Karen Makedon, VP, Marketing at InvestorCOM Inc.