Released in April, 2016, the ruling by the U.S. Department of Labor will force dramatic change in the way the financial industry delivers retirement savings advice. Further, it expands the definition of an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). The Rule also has changed exemptions that, until now, were listed as part of the prohibited transaction exemptions for investment activities.*
“Best interest” vs. “Suitable”
Before the Rule, a recommendation by a broker was only required to be “suitable,” which proponents of the new rule suggested encouraged some sellers to not have the best interest of clients in mind. Rather, the proponents argued, sellers of investment products too often suggested clients purchase high-fee products that paid high commissions to brokers. Under the Rule, financial advisors will be required to act in the best interest of their clients when providing investment guidance.
Everyone’s a Fiduciary
Designed to benefit purchasers of financial products, the Rule could have a significant down-side impact on broker-dealers, investment advisors, insurance agents, and plan consultants who will now be designated as fiduciaries to ERISA plans and individual retirement accounts. These advisors must either avoid receiving payments that create conflicts of interest or comply with the exemptions contained in the final rules, including:
- Acknowledge the fiduciary status of the firm and its individual advisors;
- Adhere to the basic standards of impartial conduct, including giving prudent advice that is in the best interest of the customer, avoiding misleading statements, and receiving no more than reasonable compensation;
- Adopt policies and procedures designed to mitigate conflicts of interest; and
- Disclose conflicts of interest and the cost of advice.
While the full impact has yet to be felt or tested, the challenge to comply with the Rule is causing panic and headaches in conferences rooms across the financial industry.
What challenges are facing your firm?
Meeting the Challenge
On June 7, 2016, the DOL Fiduciary rule became effective. While full implementation doesn’t occur until January 1, 2018, your firm will need to meet key deliverables along the way including the April 2017 requirement to acknowledge your fiduciary status, have “best interest” standards in place (along with monitoring for adherence) and methods to disclose conflicts of interest. You will need to consider:
- What will this mean to your business, your advisors and your clients?
- How will you differentiate your offer in this environment?
- How will you balance the need to keep your advisors informed as you work out the complexity of these requirements?
- What financial impact does compliance to this new standard mean to your strategic growth plans and ability to deliver new services and technology?
Meeting new regulatory challenges is hardly new to our industry. Your firm will be able to navigate this newworld, but it will take some effort.
C3 can help walk you through the process of identifying issues, developing standards and incorporating new policies and procedures into your practices. We’ll start with a full assessment of how your firm operates today.
Examine Your Book
Before you can truly know what impact the Rule will have on your business, you first need to ascertain how broadly the Rule invades your current book of business. We’ll start with your customer demographic. Segregate the following data using the same customer attributes your firm typically employs (e.g. by HH account size, revenue produced, etc):
- Clients with both qualified and non-qualified funds held by the firm
- What percentage of those funds are held in brokerage versus managed money?
- For those within managed money, which ones meet the definition falling under the level fee fiduciary carve out?
- For those clients holding positions in their brokerage accounts, what does the overlap look like between qualified and non-qualified accounts
- Clients likely to retire in 2017 and 2018
Once you know how many clients and accounts are affected, you can look at the impact to your bottom line.
Follow The Money
Undoubtedly, compliance with the Rule will have a revenue impact on your firm. To understand how big of an impact, you need to ask some very detailed questions:
- Have you identified your firm’s acceptable “reasonable compensation” targets?
- Have you engaged in scenario analysis to determine the impact of those changes?
- Have you forecast the compliance impact for additional monitoring?
- Have you forecast the cost for legal defense from litigation likely to result (if the 401(k) space is an indicator) from challenges to meeting the standard?
- What will be the likely impact of E&O premium increases?
Those are hard dollar impacts, but what about the operational costs?
Putting the Pieces Together
Any time you have to implement sweeping procedural changes, the cost-of-doing-business factor looms large. It’s important to assess the operational impact of complying with the Rule. We’ll discuss:
- What is your current strategy for transactional business?
- Will it need to change or go away completely? Under what conditions?
- What segmentation instructions will you give advisors?
- What, if any, latitude will they have to respond to individual client needs?
- When do you anticipate sending BICE notifications to existing clients?
- What ancillary Q&A materials need to be created to accompany the communication?
- What process will you put in place to adapt call center and advisor training to address new issues that arise when clients begin calling?
- Will you be utilizing a “robo advisor” system for certain accounts?
- How will that message be delivered?
- Will the client be given an option to stay?
- Will plans now be required for all clients? What process or system do you have in place to manage to the plan?
- How will you integrate 401k assets into the plan?
- Have your advisors traditionally provided any guidance re: 401k choices relative to the client’s overall plan?
- Will this fall under education or advice?
- How will ultimate rollovers be justified vis a vis fee increases from the 401(k) plan?
- Have you identified what services you or your advisors provide that do not typically exist in the 401k space?
- How will you handle disclosure requirements?
- Who is drafting your disclosures?
- How will you ensure that all scenarios are covered?
- If certain products, options or procedures need to be changed or eliminated, how will that transition be managed?
Now that you have a solid picture of what needs to change, you can transition to how to incorporate these changes into your practice.
The Compliance Process
While the Rule is prescriptive on some things, it leaves much to interpretation (e.g. what is considered reasonable compensation). Additionally, the protection of arbitration is removed, opening the door for firms and advisors to become victims of frivolous lawsuits. While the proper preparation won’t eliminate the risk of lawsuits, client-focused, defensible business practices can reduce the risk of expensive settlements.
A thoughtful implementation process, which includes the right people and a solid communication plan, can make compliance with the Rule less costly all the way around.
Take the time to follow this 3-step process:
Understand the problems and select the problem-solving team, before you jump to a fix. Identify:
- What needs to change.
- Timelines and dependencies.
- Who will be a part of the project team and own the issues.
Once you understand the scope of work, take time to reach agreement on what will drive the priorities for implementation:
- Create an agreed upon scoring and weighting methodology.
- Ensure the working groups have a shared understanding of how to score and weight their proposals.
- Ensure a senior steering committee is able to approve decisions and defend approach with executives.
This new rule is on top of, not in lieu of, other regulatory requirements. Remember to:
- Ensure that necessary changes to qualified asset management doesn’t create a negative “spillover process” to non-qualified accounts
- Incorporate procedures for management to identify and remediate advisor challenges with implementation
- Have a standing team ready to address operational or compliance conflicts that arise when integrating these requirements into existing practices and procedures.
Preparation today, along with open and excessive communication – to staff and clients – along the way, will lessen the negative impacts of the DOL Fiduciary Rule on your operational practice and bottom line.
With the aggressive implementation timeline, you can’t afford to “teach” your augmented staff about the industry. Many consulting firms, large and small, see the DOL Fiduciary Rule as a business opportunity but may not have the industry acumen to provide both staff augmentation and thought leadership. C3 can bring both to the table.
C3 can act as your “de facto” chief of staff while implementing the DOL Fiduciary Rule. Let C3 manage the implementation process while you continue to execute on your organization’s strategic plan.
C3 Consulting helps financial service providers build and maintain success in times of great transition—times like these. An award-winning, record-breaking industry expert, we can help you identify issues across your organization, plan your moves and implement a cohesive, thoughtful strategy.