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DOL Fiduciary Rule
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Transparency Is in the Clients’ Best Interest

To act in the best interest of your clients you need to have a clear understanding of their overall financial picture and their financial behavior.

By Sean F. Flynn and Kevin Nolan

Even though the rule is dead, with little signs of life in the near future, the ruling affected how advisors approach investment selections as well as modes of compensation. The average investor is becoming more educated when it comes to their investments, which is long overdue. Investors are becoming aware of fees and the idea of conflict-free advice. This much welcomed empowerment of the investor has pressured advisors to take a deeper look at how they’re investing clients’ money and at what compensation the advisor is getting. Ultimately, all of the controversy around the DOL rule has gave the advisor the opportunity to solidify a relationship with clients by becoming more transparent, able to quantify their value directly relating to the fees, and provide more meaningful financial planning advice.

The idea of lending oneself out as a fiduciary has a lot more positive impact than one would think.  As a fiduciary you have to act in the best interest of your clients so you need to have a very good understanding of their overall financial picture as well as their financial behavior.

Fees and fee transparency were a big part of the fiduciary rule. The time leading up to the implementation of the DOL rule accelerated advisors, who were in the process of or thinking about adopting a fee-only type model, to change their compensation model.

Over the past 10 years, especially in the last five, we have seen a large number of advisors leave large Wall Street wirehouses to join independent advisory firms. By and large the RIA model has the ability to drastically reduce or eliminate any conflicts of interest. The rule forced advisors to develop a better understanding of all the different fees their clients incur on a yearly basis. Since investors were asking their advisors more questions and in some cases, shopping around, advisors not only had to disclose each fee, they also had to be able to defend each fee. Some advisors started the conversation with clients about their fees, both implicit and explicit, before the clients had a chance to ask the questions, beating them to the punch and ultimately gaining more trust. Clients don’t mind paying fees as long as they know what they’re being charged and why the fee is being charged.

Additionally, the DOL rule has prompted the advisor to defend not only their fee but the internal expense ratio of funds, ETFs and other securities, if they use such products, ticket charges, commissions and custodian fees. To some degree, advisors now have a more intimate relationship with the money managers they use. Advisors need to articulate why a security is underperforming or why it’s beating the benchmark. The better understanding a client has on the activity in their account the more trust they will have with the advisor.

Again, most clients just want a general understanding why they are invested the way they are and what is the reasoning behind why the advisor is using the particular investment vehicles they’re in. Some advisors have a one-pager showing each fee charged to the client, when it was charged and how. This allows the advisor to be 100 percent transparent to a prospect or a client, which builds trust on the first meeting.

A lot of advisors used these conversations of fees with their clients to their advantage. That being said, fees are just a part of acting as a fiduciary. These conversations permitted the advisor to articulate their value proposition and service model, both allowing advisors to quantify their value-add in dollars and cents. These conversations can lead to more meaningful and deeper conversations around financial planning. Advisory firms that are leading with planning can now transparently lay out their planning capabilities and how they can add value to the client almost immediately. To act as a fiduciary to your client, an advisor must be able to articulate their investment philosophy, fee structure, and service model, but also defend it.

Ultimately, the controversy around the DOL fiduciary rule is that its implementation and its retraction gave advisors a chance to take a step back and review their investment process, along with money manager selection, internal and external fees, and their service model. In some cases, advisors made changes to or drafted value propositions to share with their clients so they get a better understanding of how their advisor is adding value beyond the scope of security selection and asset allocation, such as financial planning, tax planning and Social Security planning, next generation and succession planning. Even though the fiduciary rule is dead, advisors now have a chance to make their business more transparent to the client, show their value proposition and clearly display how they’re working in the best interest of their clients.


Sean F. Flynn is a financial advisor and CCPS® at Essex Financial, Southport, Conn. office. Kevin Nolan is a financial advisor and CFP® at Essex Financial, Southport office.

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