The DoL Fiduciary Rule: A State of Confusion

A month ago, on April 4, 2017, less than a week prior to the scheduled implementation date for the first phase of Department of Labor (DoL) Fiduciary Rule to go into effect, the DoL filed to delay the regulation by 60 days.  Therefore, as of now, the DoL Fiduciary Rule is scheduled to go into effect June 9, 2017. The DoL has also said that all requirements except for the Impartial Conduct Standards will be deferred until January 1, 2018.

Simultaneously, the DoL is undertaking a review of the rule to determine whether or not the regulation as it stands now could hurt Americans ability to get retirement advice. This review is expected to be completed by January 1, 2018. 

The chain of events has generated uncertainty for financial institutions who provide advice to retirement plans, plan sponsors, fiduciaries, beneficiaries, individual retirement accounts (IRAs), and IRA owners.  For the past year, these financial institutions, which include firms of all sizes, have been forced to rethink their technology that supports their compliance efforts, including but not limited to how advisors justify recommendations and document those recommendations. 

This effort has not gone to waste.  The compliance tools and training packages that have come out of this effort to quickly comply with the DoL Fiduciary Rule will have lasting impact and use cases for a much larger audience, including anyone in the field of delivering investment advice or investment products, regardless of what happens with the DoL Fiduciary Rule. 

In my latest report, Regulation as an Impetus for Change: Technology Solutions for Fiduciary Responsibility, I study products that make compliance with the DoL Fiduciary Rule simpler and more efficient.  Vendors covered in this report include: Broadridge, Fi360, InvestCloud, Morningstar and SEI .  Solutions include product shelf assessment services, refined education and training programs and dashboards, and products that help advisors prove that they are working in the best interest of their clients.

 

Technology, Training & Compliance in Light of the Fiduciary Standard

Technology, Training & Compliance in Light of the Fiduciary Standard
Capturing retirement assets is paramount for brokerages. When thinking about the word saving, it is hard not to think about retirement.  Brokerages are constantly looking for rollover assets, and as baby boomers retire, this search has never been more significant — which is why, when the DoL Fiduciary Rule was proposed, brokerages quickly reacted.

  April 10, 2017, when Phase 1 of the DoL Fiduciary Rule goes into effect, is quickly approaching.

  My latest report, The Quest for Retirement Assets: When the Light Shines on the Fiduciary Standard, explores ways that brokerages are reacting to the DoL rule. Brokerages continue to rethink their operating model. Brokerages are questioning their existing technology: Can it support a new business model? How should training be embedded and amended to support compliance with the DoL Rule? In my report I lay out some of the challenges facing brokerages, as well as best practices for compliance and training.   Regardless of whether the DoL rule is delayed, changed, or repealed, advisors need to know how to clearly communicate their offering to clients as it relates to the fiduciary standard. Investors are more aware than ever of the fiduciary standard. Even if the DoL relaxes its stance, there is no doubt that investors will continue to pressure advisors to act as fiduciaries. It won’t be long before clients ask for proof that portfolio transactions and ideas are made in their best interest.  

Roll over, don’t play dead

In my most recent report, Wings of a Butterfly: Regulation, Rollovers and a Wave of Optimization Software, I discuss the challenges the DoL conflict of interest rule poses to the $7 trillion IRA rollover business. These challenges center on the need for advisors to break down 401k plan costs and make apples-to-apples comparisons of proposed rollover solutions.   Why focus on the rollover? First, the rollover decision serves as a touchstone in the relationship between client and advisor. Trust sits at the center of recommendation to roll over, and seldom are the vulnerabilities of the client so exposed. The importance of the  rollover decision is further magnified by timing. It often takes place at the apex of client wealth, where the consequences of missteps for the investor can be severe. For the advisor, the rollover offers a unique opportunity to capture assets, or at least advise on their disposition, as well as present a coherent strategy for drawdown.   The implications of the decision to roll over extend beyond the client advisor relationship to firm strategy, of course. They are particularly relevant to product development and distribution. I’ll discuss these implications in a later post.

DOL or DOA? The Election and the Conflict of Interest Rule

It’s one of those watershed moments. Clinton wins, and the Department of Labor (DoL) conflict of interest rule takes hold and likely gets extended beyond retirement products to all types of investments. Trump wins, and DoL gets slowed down and perhaps even rolled back.

Assuming Clinton wins (which appears likely) firms will need to gear up on three fronts:

  • Platform: DoL makes paramount the ability to deliver consistent advice across digital and face to face channels. Such consistency requires a clear view of client assets held in house, which in turn implies eliminating legacy product stacks and their underlying technology silos, as I note in a recent report.
  • Product: Offering only proprietary products only is a non-starter under DoL. But too much product choice can be as bad as too little. Firms must demonstrate why programs and portfolios offered are the best for each particular client.
  • Proposition: In a best interest world, the client proposition must extend beyond price. Client education, transparent performance reporting and fee structures, as well as an easy to use digital experience, will distinguish stand outs from the broadly compliant pack.

None of the pain points above lend themselves to easy solutions. As such, the banks and brokerages most affected by DoL are struggling to develop processes that go beyond exemption compliance. I’ll discuss more comprehensive approaches in the All Hands on Deck: Technology's Role in the Scramble to Comply with the DOL Fiduciary Rule  webinar I’m co-hosting this November 14.

I hope you will join me for the webinar, and in the meantime, you will share your thoughts and comments on this post.

Scare tactics in the run up to the DoL fiduciary standard roll out

DoL monsterOne of the apocalyptic scenarios floated by antagonists to the proposed DoL fiduciary standard is the emergence of an “advice deficit,” whereby reliable investments counsel becomes available only to the most affluent investors. This argument assumes that investors have nowhere to go for advice but to a real life advisor. For more than a decade, however, tech savvy investors have had access to online tools that basically walk them through the creation of a personalized portfolio. For example, eTrade’s Build-Your-Own-Portfolio uses a questionnaire to recommend an asset allocation, which a customer then executes on his own. Competitor Ameritrade launched a like-minded Amerivest portfolio asset allocation tool back in 2004. The robo advisor represents an advanced form of this technology, in that it extends the asset allocation process to the construction of the portfolio itself. This ease of execution makes what had been a solution for self-directed (and as mentioned, tech savvy) investors into a viable option for any investor able to log on to a website. Sure, not all investors will be comfortable taking investment advice online. But to say these investors have no options is a scare tactic. Its deployment underscores the degree to which commission based brokerage will fight to protect its own interests, even when they come at the expense of the investor. I’ll have more thoughts as we approach the roll out of the DoL standard this spring.