In preparing service agreements for financial consultants, we have identified a number of do's and don'ts that we will discuss in this column from time to time. Recognizing that not all financial consultants serve in a fiduciary capacity, we have broken the items down between fiduciary and non-fiduciary roles.

In the last column, we talked about the importance of having a service agreement. In this one, we discuss some of the contents.

Do - state clearly and precisely the services you will render.

Non-fiduciary advisers: This is especially important if you do not intend to serve as a fiduciary - because you want to make it clear that your services are neither discretionary nor amount to "investment advice" for ERISA purposes. (The ERISA definition is much narrower than the securities law definition.) And you want the client to acknowledge that you are not a fiduciary. This acknowledgement will not change the facts if you are a "functional fiduciary," but it can prove helpful in the event of a dispute.

Fiduciary advisers: If you intend to serve as a fiduciary, keep in mind that fiduciary status may only apply to certain of the services you provide. In some agreements, we have segregated the duties into fiduciary and non-fiduciary functions and provide separate fee schedules for each. And it is equally important for the fiduciary adviser to define clearly what services he will provide, e.g., assist in provider searches? Crafting an investment policy statement? Selecting the funds to be offered to participants? Monitoring the IPS and/or the funds? Etc.

Don’t - forget to specifically state areas where you are not willing to undertake responsibility.

Non-fiduciary advisers: You need to make it clear that you are not exercising discretion or giving advice regarding the purchase, sale or holding of any securities. You need to make it clear, for example, that in providing information regarding the performance of funds included in a plan (if this is something you do), you are giving the information to the plan fiduciaries to assist them in fulfilling their monitoring duties, but are not providing specific recommendations about investments along with the data.

Fiduciary advisers: Fiduciary duties can be separated into discrete areas. As a consultant, you will want to make it clear that you do not have any discretion over the administration of the plan, for example, to interpret the document, determine eligibility or vesting or otherwise administer the plan. You will want to make clear that you are not the plan Administrator (as defined under ERISA).

Finally, for both non-fiduciary and fiduciary advisers, you should carve out the areas where you are not assuming responsibility, such as for company stock, individual brokerage accounts and participant loans.

In future newsletters, we will discuss other do's and don'ts in structuring your client service agreement.


Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: The Adviser Report