Adviser Do’s and Don’ts

By Bruce Ashton

We’ve been asked to work on service agreements by a large number of advisers with both plan and wealth management clients. In many instances, the adviser’s service agreement (and Form ADV in the case of RIAs) has been geared almost entirely to the wealth management side of their business, and the agreement addresses a number of issues that simply don’t apply to a plan … and the agreement fails to acknowledge some of the important issues that affect 401(k) and 403(b) plans. With the DOL set to release new disclosure rules this Spring, we want to alert advisers with both types of clients to important do’s and don’ts.

DO

• Have an agreement that accurately describes what you are going to do for the client – and explains any limitations on your services.

• Make sure you coordinate the description of services in the agreement and in other materials you may give to the client, such as the Form ADV or brochure in the case of RIAs.

• Make sure your agreement complies with specific disclosure rules for service providers to plans subject to ERISA. This will become critical when the DOL releases the new 408(b)(2) regulation.

• Coordinate the disclosures in your service agreement with the disclosures that will be required under Schedule C to Form 5500. (This requirement applies only to service providers to plans with 100 or more participants who receive $5,000 or more in compensation from the plan each year).

DON’T

• Retain provisions in a plan agreement that don’t apply. This would include many of the provisions applicable to wealth management clients, but are not relevant to the work you’ll do for plans. This would include selection of a custodian (generally, the recordkeeper will select the custodian in the plan context), selection and supervision of the broker for trades (the recordkeeper will do that), obtaining best execution (again, this doesn’t apply in the plan context).

• Say you’ll be a fiduciary without being more specific. This is important for a couple of reasons: first, some of what you do may be non-fiduciary services under ERISA and, thus, subject to different rules; second, if you are a fiduciary because you give investment advice, you want to make it clear that you are not a fiduciary with discretion over the assets or operation of the plan.

• Say that you’ll provide “investment management” when you give advice but the client can elect to follow that advice or do something different. Under ERISA, investment management implies that you have discretion.

Remember that even if you only work in the 403(b) tax exempt market and don’t provide services to 401(k) (or other) plans, the rules governing service provider conduct and disclosures may still apply to you. Tax exempt 403(b)s are subject to ERISA if they fall outside the DOL’s regulatory safe harbor, so you cannot assume that you can ignore the ERISA rules just because the plan doesn’t say 401(k).

© 2010 Reish & Reicher, A Professional Corporation. All rights reserved. THE ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish & Reicher does not warrant and is not responsible for errors or omissions in the content of this report.

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