What Might ‘Un-levelize’ Level-fee Fiduciaries?

Noted ERISA attorney Fred Reish looks at the kinds of payments or benefits that will “un-levelize” a level-fee fiduciary.

In a recent blog post, Reish notes ordinarily charging a level fee (for example, 1% per year) for non-discretionary investment advice or discretionary investment management for plans, participants or IRAs, and receiving any additional benefits or payments attributable to those services, means that additional payments will un-levelize the compensation and result in a prohibited transaction (unless, as noted in a previous post, if the payments or benefits are offset dollar-for-dollar).

Reish says that regarding fiduciary services, the definition of compensation includes any money or things of monetary value — both cash and non-cash amounts. But he notes that the Department of Labor (DOL) explains that the compensation must be directly or indirectly connected to a recommendation:

The term ‘‘fee or other compensation, direct or indirect’’ means . . . any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the purchase or sale of a security or the provision of investment advice services, . . . A fee or compensation is paid ‘‘in connection with or as a result of’’ such transaction or service if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.

Additional Compensation

What might constitute additional compensation? Well, in addition to commissions, 12b-1 fees, revenue sharing, and trailing commissions, Reish explains that it could include things like trips, gifts, awards, reimbursements, marketing support, conference registrations, and so on. In fact, the DOL pointed to some of those payments in its definition of third-party payments in the Best Interest Contract Exemption (BICE). Reish observes that the DOL says that third-party payments include:

• sales charges when not paid directly by the plan, participant or beneficiary account, or IRA;
• gross dealer concessions;
• revenue sharing payments;
• 12b–1 fees;
• distribution, solicitation or referral fees;
• volume-based fees;
• fees for seminars and educational programs; and
• any other compensation, consideration or financial benefit provided to the financial institution or an affiliate or related entity by a third party as a result of a transaction involving a plan, participant or beneficiary account, or IRA.

And he notes that the fiduciary rule includes additional examples of what constitutes compensation:

• commissions;
• loads;
• finder’s fees;
• revenue-sharing payments;
• shareholder servicing fees;
• marketing fees;
• distribution fees;
• underwriting compensation;
• payments to brokerage firms in return for shelf space; 
• recruitment compensation paid in connection with transfers of accounts to a registered representative’s new broker-dealer firm;
• gifts and gratuities; and
• expense reimbursements.

Reish closes with some words of caution to those who focus on wealth management and are not familiar with the rules — a reference to the 1980s TV series Hill Street Blues: “Be careful out there.”