401(k) Lawsuits, Investment Advisers and Fiduciary Breach
One wonders if financial professionals ever tire of new rules, regulations and the pressures of trying to do their job while avoiding liability landmines at the same time. Based on October 2012 comments made by several prominent ERISA attorneys - Michael Prame (Groom Law Group) and Fred Reish (Drinker Biddle & Reath LLC) - as part of the annual Center for Due Diligence conference, registered investment advisors ("RIA's) may want to eat more wheaties in preparation for battle with an increasingly active plaintiff's bar.
According to "What a wave of 401(k) lawsuits tell us about what RIAs really need to worry about" (RIABiz, October 25, 2012), counsel for plan participants began to rethink their strategy in the aftermath of some unwelcome ERISA litigation losses. As a result, future lawsuits are likely to focus on the use of "expensive" share classes when lower costs choices are available. A failure to monitor record-keeping costs and/or inadequately negotiate rebates from service providers are likely allegations that could ensnare financial advisors who work with employee benefit plans. Both legal experts discussed recent ERISA lawsuits, adding that registered investment advisors should focus on whether they are properly educating their sponsor clients about which share classes make the most sense for a particular plan(s).
RIAs may soon be tussling with another regulatory body if the Financial Industry Regulatory Authority ("FINRA") wins the battle to regulate financial advisors. According to "Investment Advisers Fear FINRA Mission Creep" by Wall Street Journal reporter Daisy Masey (November 7, 2012), allowing RIAs to use FINRA's arbitration forum is seen by some as an attempt to lump financial advisors with broker-dealers and confuse an advisor's fiduciary standard with a "lesser standard" for brokers. As Dr. Susan Mangiero wrote in "Breach of Fiduciary Duty as Top Complaint in FINRA Arbitration Matters" (October 12, 2012), it is critical to understand how the concept of fiduciary duty compares with suitability rules.
Whether 2013 will prove to be the Year of the Fiduciary remains to be seen but it sure does seem like things are shaping up for a busy time for RIAs and financial regulators.