Updated on: February 3, 2021

In May 2015, the Supreme Court’s unanimous ruling in Tibble v Edison clarified once and for all that a fiduciary has an ongoing obligation to monitor the investments held by the plan as designated investment alternatives and to remove those investments that are imprudent.

The Supreme Court relied heavily upon Trust Law in making its ruling, acknowledging that a trustee has a continuing duty to monitor trust investments and remove imprudent ones. This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.

The Restatement (Third) of Trusts states the following: “[A] trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.” §90, Comment b, p. 295 (2007).

The Uniform Prudent Investor Act confirms that “[m]anaging embraces monitoring” and that a trustee has “continuing responsibility for oversight of the suitability of the investments already made.” §2, Comment, 7B U. L. A. 21 (1995).

Scott on Trusts implies as much by stating that, “[w]hen the trust estate includes assets that are inappropriate as trust investments, the trustee is ordinarily under a duty to dispose of them within a reasonable time.” 4 A. Scott, W. Fratcher, & M. Ascher, Scott and Ascher on Trusts §19.3.1, p. 1439 (5th ed. 2007). And Bogert says the same. In Bogert 3d §685, at 156–157 (explaining that if an investment is determined to be imprudent, the trustee “must dispose of it within a reasonable time”); see, e.g., State Street Trust Co. v. DeKalb, 259 Mass. 578, 583, 157 N. E. 334, 336 (1927) (trustee was required to take action to “protect the rights of the beneficiaries” when the value of trust assets declined).

What This Means to You

The Court’s decision has established that a plaintiff can sue for a violation of the continuing duty to monitor that applies to decisions year by year. This decision is in alignment with the DOL’s expectations under the New Fiduciary Definition/Conflict of Interest regulation as referenced in the preamble to the Best Interest Contract Exemption (“BICE”).

It states, “Further, when determining the extent of the monitoring to be provided, as disclosed in the contract pursuant to Section II(e) of the exemption, such Financial Institutions should carefully consider whether certain investments can be prudently recommended to the individual Retirement Investor, in the first place, without a mechanism in place for the ongoing monitoring of the investment. This is particularly a concern with respect to investments that possess unusual complexity and risk, and that are likely to require further guidance to protect the investor’s interests. Without an accompanying agreement to monitor certain recommended investments, or at least a recommendation that the Retirement Investor arrange for ongoing monitoring, the Adviser may be unable to satisfy the exemption’s Best Interest obligation with respect to such investments. Similarly, the added cost of monitoring such investments should be considered by the Adviser and Financial Institution in determining whether the recommended investments are in the Retirement Investor’s Best Interest.”

In other words, advisors selling IRAs are now under an ERISA fiduciary standard of care that imposes an obligation to monitor their investment recommendations. This obligation imposes more work for no additional compensation. Advisors, possibly for the first time, will need to subscribe to technology that will produce a monitoring report on the investments held. This will be particularly difficult for equity-indexed annuities since there is not a database to link to for production of a monitoring report. Of course, there is data on variable annuity side funds but very few technology providers to the financial service industry have linked that data to their systems.

In addition to the challenge to find a technology solution provider, advisors will incur costs to subscribe to the solution that they did not pay for in the past. Most technology platforms that provide monitoring reports cost approximately $2500 per year. Better pricing can be realized if the advisors combine their purchasing power. This is where a Broker-Dealer and/or large RIA may be able to offer a valuable benefit to its advisors. Unfortunately, monitoring is not the only cost obligation under the new regime, although is is enough to give any advisor anxiety by itself.

In addition to monitor investments, advisors will also have to contend with providing their clients with a benchmarking report to support the reasonableness of their fees, the associated fees with the investments recommended, and any custodial or recordkeeping fees associated with the investment product or approach implemented.

What You Can Do

Bottom line, the total cost passed through to advisors will be different for each advisor. However, a wait and see approach will prove to be both imprudent and costly. In fact, failure to begin the preparation process in hopes of a change will likely result in a delay, measured in months, to receive compensation after April 10, 2017 when you are in compliance. At this point here is what an advisor should do:

1. Schedule time to study for your series 65 or 66 if you don’t already have it. If you wait, you might find yourself waiting months to schedule a date to take the exam. I expect Prometrics and others like them are in for a banner year of sales in 2016 and 2017.
2. Secure quotes for Fiduciary E&O insurance if you don’t already have it. If you do, request an amendment to cover IRAs under the fiduciary provisions and expect costs to go up. The new rules favor a self-policing approach that will leverage a very enthusiastic plaintiffs’ bar.
3. Hire a good law firm to develop new contracts, policies, and procedures. This may be a cost the advisor shares with other advisors that operate under a B-D or RIA of size.
4. Pressure your product vendors to begin the process now of linking to technology platforms to import client details to avoid manually entering all your client data for benchmarking. Benchmarking is now the norm, you cannot avoid it.
5. Another reason to pressure product vendors to link to technology platforms is to prepare monitoring reports which will also require the advisor to search the market for a solution to prepare monitoring reports preferably one that can do both benchmarking and monitoring so the advisor only pays for one system instead of two.

Building a link to import data between the product vendor and the technology platform will be the most time consuming. We have estimated the time to build these links into FRA PlanTools for benchmarking and monitoring reporting is 6 weeks for 2 developers per vendor. It may require more time for a vendor with multiple products. As you can imagine, an advisor that has place business with multiple products increases the time to build these links. I fear many vendors will wait until it is too late thereby causing advisors to manually enter data for each and every one of their IRA clients.

Look for more blog posts on this topic as we continue to unpack the impact it will have on advisors. One thing for sure, no one has estimated the actual cost this will have on advisors but it will be more than the most expensive dinner you have ever paid for when you include the advisors time.

 

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