Heads Up! Fiduciary on Board!

The Department of Labor (DOL) Fiduciary Rule is applicable on April 10, 2016, and in full force on January 1, 2018. Broker-dealers and their business partners are at work designing or supporting compliance programs. The effort will have an impact on both financial advisors and clients. The rule affects the financial advisor market serving individual retirement assets, most notably the individual retirement account (IRA) rollover and 401(k) plans with less than US$50 million in assets.

A fiduciary follows the “Prudent Man Rule,” which means a fiduciary shall exercise the judgment and care, under the circumstances then prevailing, that men of prudence, discretion, and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds.

There are too many moving parts for a blog—look for our upcoming report—but financial institutions (FIs) and financial advisors are on the hook to provide the evidence they have and to continuously act in the clients’ best interest, at fair prices, and for reasonable compensation. Firms must build an evidence trail of fiduciary behavior in fee and compensation range rationalization, specific product recommendations, and client ongoing attention and affirmation. There will be changes to product structures and prices, workflow processes, and technology tools. Firms will amend/design new policies and procedures.  Advisor workflows and technology tools will have new routines and enhancements, respectively. The home office will measure policy adherence in financial advisor activity, product selection, and client experience to track and flag fulfillment of the fiduciary role.

A significant training effort with financial advisors will be underway on a clear rule definition, the FI’s interpretation, the product changes, the way workflow will need to change, and proper client communication of the requirements. Financial advisors, in turn, will need to educate clients and, at times, have difficult conversations on the changes in products and services. Many FIs anticipate account movements.

In some instances, due to operational and servicing costs, small clients may be moved into robo-solutions. Already a hot topic in their own right, announcements of robo-partnership and acquisitions are regularly headline news.

FIs are wishing for market consensus in areas such as appropriate product pricing and fair compensation, where none exist right now. Therefore, firms are proceeding in their interpretation, readying for compliance, and anticipating that the work in 2017 will become an iterative process.

Clearly, FIs are balancing the proverbial three-legged stool: meeting the objectives of satisfied clients, avoiding financial advisor attrition with appropriate compensation and facilitation of business, and staying profitable in a highly competitive market. Firms are busy strategizing, speaking to vendors as a resource, inventorying accounts, analyzing product/pricing/partner/revenue/cost data, and doing so in a mad rush, with some FIs having more than 100 people devoted to the effort. People are so busy with this large task, public discourse is scarce.  

At some resting point in the future, much greater market transparency will exist, clients will align product and price points to the level of service valued, and technology automation and artificial intelligence will help reduce operational costs and efficiencies. However, the sea is choppy. Not a surprise, in such a storm.

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