Exactly six months from Monday, one of the most significant regulatory changes to impact the financial advice industry will take effect.
On April 10, 2017, the Department of Labor (DOL) will officially apply its fiduciary standard that requires all providers of investment advice or recommendations regarding a financial plan or retirement account to serve the “best interests” of clients.
Those that do not comply could be on the hook for a review from the DOL, as well as litigation filed on behalf of investors. In fact, the new rule has already spurred a flurry of fiduciary-related lawsuits as firms struggle to come to terms with their responsibilities outlined under the new rules.
With the six-month countdown underway until the official implementation of the rule, any financial professional who provides advice must get up to speed with the expectations set forth by the DOL. Below are three strategies to assist advisors in their efforts to remain compliant with the complex regulations ahead of April 10. These following strategies are foundational in an advisor’s effort to fulfill their fiduciary responsibility.
1. Maintain diligent records tracking the rationale behind investment advice. Documentation is undeniably one of the most critical factors in demonstrating compliance with the new regulation. Advisors must meticulously document their advice, providing justification for any recommendation they may make. This “supporting documentation” can include all financial data gathered, risk tolerance questionnaires and projections or scenarios on which the recommendations are based. This can be accomplished with great ease and efficiency leveraging the right technology. Features such as data gathering, cash flow analysis and comprehensive financial planning are a few ways advisors can demonstrate the reasoning behind their recommendations.
However, some recommendations are quite complex and cannot be compartmentalized with basic features. In such cases, advisors must ensure their chosen technology allows them to keep additional annotations that can explain why, in their own words, a recommendation would serve the best interests of a client. By keeping these notes, an advisor or firm has a better chance of justifying a recommendation to an independent auditor. This qualitative text entry, coupled with time stamps, strong documentation and inclusion within an organization’s compliance processes makes a strong case for compliance.
2. Reassess all existing financial plans for fiduciary compliance. Financial planning should be a continuous, ongoing process. With every significant life update, advisors must adjust the financial plan to ensure the best interests of the client are represented. Under the new regulation, this sentiment is more important than ever. In light of the new fiduciary definition and subsequent standards, advisors should review and perform a progress update on all of their existing financial plans, making adjustments based on the new rules or a client’s wishes, should they have changed. Most firms are already operating in their clients’ best interests, but come April 10, financial professionals need to ensure each plan meets the new standards of the DOL.
3. Reposition the business model of the firm, with financial planning at its core. Today, many financial professionals sell investments or offer advice before building a financial plan. In light of the new regulatory environment, we expect this business model to be completely inverted, with financial planning now at the core of the relationship.
Simply put, providing a comprehensive financial plan is the simplest and most efficient means to justifying a product recommendation or investment strategy. In the event of an audit, an advisor or firm can rapidly demonstrate the discussion and decisions that led to a specific product investment based on fully understanding the holistic financial life of the client.
Given the unique situation of each client and the complex nature of investment products and strategies, a product with higher fees might be in a particular investor’s best interest. However, if a product were to be recommended with minimal client data gathered, it would be highly unlikely that an individual or firm could justify the recommendation to an auditor. But through the vector of a well thought-out, comprehensive financial plan, an advisor can make well-informed decisions and act in the best interest of the client.
Compliance with the fiduciary rule begins with the culture and internal processes of a firm. However, the benefits of technology to an advisory firm in this new age of increased scrutiny cannot be overstated. But not just any digital service will put firms in a good position to be compliant—the offerings must go beyond simple goal-based technology. To truly reduce the risk of noncompliance and act in the best interests of an investor, advisors need a robust, well-positioned financial planning software capable of illustrating the client’s entire financial life.
Anthony Stich is director of global marketing at Advicent, a provider of SaaS technology solutions for the financial services industry.