Most successful wealth management practices have one thing in common: They sell service, not performance. There have been numerous industry studies on the topic, and for the most part, top quartile performance doesn’t rate in the top three. No surprise here—clients want to feel important, special and need to believe their advisor is honest. The 80/20 rule still applies to most things, and this includes service. You give the best service to your best clients. Generally speaking, small clients do not receive the same level of service as those clients who produce significant revenue. That’s why coaches tell you to reduce your overall client base and refocus on expanding the top end of your book. Many advisors loathe to fire a client for no good reason. It turns out, the DOL is forcing you to do just that.
With the DOL fiduciary rule going into place in April 2017, a significant portion of practice management going forward will be around IRA compliance. And, although there is no doubt that all readers of this article currently put their client’s interest first, you must now prove it. Therein lies the rub: What exactly do you have to prove? The lack of, or mitigation of conflict is the cornerstone of the rule. However, based on interpretation of the rule, you need to provide a minimum service standard to all IRA clients. Due to the fact that everyone’s definition of what a minimum service standard is differs, this is more interpretation nuance than can be left to assumption.
Therefore, all advisors should put in place four basic tenets to manage qualified assets going forward. This will allow your service to be objectively reviewed by clients, regulators and (gulp) plaintiff attorneys. If you meet these four objectives with every one of your clients, you can feel comfortable that your minimum standard of care has been met.
- Identify the client’s Investment Objective (“IO”), then define what that means. Everything starts with what the client’s needs and goals are. Once these are known, you can identify the client’s IO. But don’t stop there. Make sure the client knows what that IO actually means, what your interpretation of the identified IO is and what investment decisions it drives.
- Align all investments in that IRA to meet the IO. Once the IO is recognized, investing must be orchestrated in a way that will support the IO. It is not merely an option to believe that an investment vehicle will work to meet the IO; it must be the best decision in your arsenal. That means assessing costs, long-term outlook, historical returns and management discipline. Finally, if an IRA is part of a larger asset allocation, be prepared to look at defending the entire asset allocation and investment vehicles holistically.
- Document your advice. This one has been beaten into the ground already. Remember that investment advice equals a new decision. If you gave someone an asset allocation, you gave advice. Told them where to custody assets? You gave advice. Explained to them that the allocation should include specific investments? Advice. Buy/hold/sell needs to be documented, but that is not all of it.
- Review every IRA, then see 1–3 above. Every IRA will need to be reviewed annually to identify if the IO is still applicable. Then you need to review to ensure the investments in that account are harmonized to meet the IO. Finally, you need to document that process. This review is an absolute necessity like the rest of the list. But, it is probably the most important part. It is fairly well accepted that account reviews must take place at least annually. This also forces you into thinking about how the process will take place, what tools ensure compliance with the IO, what investments are you using in client accounts, etc. Finally, you should consider reviewing the account against an investment policy statement of some kind. This will cost you time up front, but in the long term it assists in staying compliant and consistent with your investment thesis by account.
If you meet all these objectives for all IRA clients, how much time do you have left to prospect? Provide additional services? Manage your brand? Market? The short answer is with a new minimum standard, it is vital to your practice that you limit the total clients you take on. If this process takes you two hours a month per client (not just IRAs), you are looking at 24 hours a year per client. That is the same for $50,000 IRAs and $3,000,000 households. Do you spend more than two hours a month with any client? Add that to your total. For a practice with 200 clients, you are talking about 4,800 individual hours a year to meet your requirements. What do you have to make per client for those numbers to make sense? Probably more than a $50,000 account can pay you, right?
The DOL has created a lot of unintended consequences. One of them is that advice is going to get more expensive. That is not your fault. You and our practice have a fiduciary responsibility to provide all your IRA clients with a minimum level of service. Your only option to meet your responsibilities will be to reduce your number of clients. Reduce to comply: This is no longer just a practice management topic, but your best opportunity to meet your fiduciary responsibilities.
Matthew Reynolds is the Chief Operating and Compliance Officer at Chicago-based financial services firm Noyes and its subsidiaries David A. Noyes & Company, Member FINRA and Noyes Advisors, LLC, a registered investment advisor with the SEC.
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