On Monday, House Republicans wrote to Secretary Solis about the Department of Labor's expected re-proposal of its regulation on the definition of an ERISA fiduciary. One of the points of contention has been the extension of fiduciary obligations to those who provide advice on the investment of pension, 401(k) and IRA assets.
The letter makes a good point - any regulation by the Department should not the increase investor confusion identified by the SEC (and, in a separate report, the GAO). The confusion being referred to is the confusion by investors on whether they can count on their advisers to act in their best interests.
The reason for the current confusion is that sometimes investment advisers are fiduciaries, in which case they do have an obligation to act in the best interest of their clients. At other times the providers of investment advice are not fiduciaries. In those cases, they may only have an obligation to provide 'suitable' advice. In non-legalese, an obligation to provide 'suitable' advice means that it is legal for the adviser to provide advice that is in the adviser's best interest (e.g. pays the highest commission to the adviser or has the highest fees) so long as the advice is appropriate to the client's circumstances. In more direct terms, a non-fiduciary may advise a client to make an investment that pays higher fees to the adviser even though the adviser knows there are equivalent, lower fee investments available.
So, when is an adviser a fiduciary? That answer is extraordinarily complex and the source of the investor confusion that worries the House Republicans, the SEC, and GAO. If the advice is about pension, 401(k), or IRA assets, it currently depends on a 5-part test written in 1975 by the Department of Labor. If the advice is about other assets, the answer probably depends on laws and regulations overseen by the SEC. Confused yet?
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