Disclosing Commissions: The Registered Rep Dilemma Under 408(b)(2)
With 408(b)(2) fee disclosure rules in effect, commissioned advisors face new challenges in meeting disclosure requirements while justifying fee reasonableness.
David Witz1 min read295 wordsFinancial Advisor (“FA”) is a generic term that is often applied to both commissioned and fee-based advisors. For purposes of this article, the term FA will refer to registered representatives operating under a Broker-Dealer (“B-D”) model that receive commissions in connection with retirement plan sales.
Commissioned based FAs collect commissions from retirement plan sales that are tied to individual securities, mutual funds, variable annuities or group annuity products. Historically, FAs that collect commissions are required to have a fiduciary sign a commission disclosure form when the plan assets are placed in a group or individual annuity contract sponsored by an insurance company.
The New Requirements
This changed on July 1, 2012, when the new 408(b)(2) fee disclosure rules went into effect. Now, FAs must provide the responsible plan fiduciary (“RPF”) with a written disclosure that communicates:
- The fees charged for services rendered
- Where the fees come from
- The FA’s status as a fiduciary
In other words, disclosing fees is the legal obligation, fee reasonableness is the ISSUE.
Standardized vs. Customized Disclosures
The B-D generated advisor fee disclosures typically fall into two categories:
- Standardized – A disclosure that includes a list of services that applies to every FA under the B-D umbrella.
- Customized – A disclosure that includes a list of services that may be selected under mutually agreeable terms between the FA and the client.
The Fee Reasonableness Challenge
Unlike fee-based advisors, FAs have rarely provided retirement plan clients with a service agreement that outlines the services rendered for commissions received. This creates significant challenges when demonstrating that fees are reasonable for services provided.
Conclusion
The 408(b)(2) regulations have fundamentally changed the landscape for commissioned advisors in the retirement plan market. While the regulations focus on disclosure, the real challenge is demonstrating fee reasonableness, a subjective determination that requires clear documentation of services provided in exchange for compensation received.
