Skip navigation
DOL Fiduciary Rule
digital eye BrianAJackson/iStock/Thinkstock

Fostering a Culture of Compliance for the DOL Fiduciary Rule

Firms should focus on two key areas to create a unified approach to compliance and risk—surveillance monitoring and the design and control of investments.

By Tina Lorenz

After numerous delays, updates and court decisions, the future of the Department of Labor’s Fiduciary Rule remains uncertain. While regulators still have not offered a clear picture of what to expect, advisory firms are using this time to examine their processes and payment structures to ensure they will be prepared to comply.

This move from a suitability standard to a fiduciary standard represents a seismic shift for many advisory firms and broker/dealers in their approach to compliance. More than half of registered investment advisor say the rule will increase the amount of time spent on compliance, according to a 2016 Fidelity survey.

Under this new regulatory environment, compliance can be something of a moving target—firms are stuck trying to adhere to rules that aren’t yet being enforced and may well change. In this new reality, reacting to new standards doesn’t go far enough. Advisory firms must focus on developing a proactive risk mitigation strategy.

Many advisors are turning to the latest technologies to create a culture of compliance, but determining which technology investments are right for their organization can be a challenge. Firms should focus on two key areas to create a unified approach to compliance and risk—surveillance monitoring and the design and control of investments.

Monitoring and workflow

Under the DOL rule, the burden of proof for demonstrating that advisors have acted in the best interest of their investors will lie squarely with advisory organizations and the b/ds. For many firms, this continuous monitoring requirement will demand significant updates to daily operations. Nearly 7 in 10 advisors say accommodating workflow changes spurred by the DOL regulations will be somewhat or very difficult, according to research from the Aite Group. The survey also found that documentation, including more involved reporting requirements like validating decisions, is another key pain point for 64 percent of advisors.

Firms and b/ds therefore need to adopt a streamlined process to manage the near-constant flow of auditable information and transactions. Gone are the days of advisors digging back through old emails and notes from phone conversations to show they have acted in a client’s best interest. Compliance-monitoring tools that enable advisors to automatically generate reports documenting their advice and investment decisions can create more transparency and set a firm-wide standard for reporting.

This approach can also simplify workflows and account reviews. Exception-driven cases can be automatically flagged and tracked through completion and resolution. This consistency allows an organization to create a unified level of risk tolerance by ensuring all advisors are operating under the same standards and individual transactions are receiving the same level of scrutiny.

However, it’s important to note there is no replacement for due diligence on the part of advisory firms and individual advisors. No amount of documentation or evidence will have any value unless firms are establishing the right processes and advisors are able to competently demonstrate they've acted in the best interest of their clients.

Design and control of investments

New digital investment platforms are also rising up to meet the needs of advisory firms in light of the new DOL rule, especially when it comes to vetting and unifying investment product offerings. Depending on an organization’s risk tolerance level and best interest contract exemption considerations, there may be products advisors should not sell or offer to investors.

Digital investment platforms with private exchanges allow firms to restrict access to those products and only show advisors specific investments and providers that meet internal standards. Organizations can then establish a firm-wide proactive approach to risk where the highest levels of senior leadership are setting criteria for selecting providers and investment products. Rather than correcting decisions that conflicted with risk mitigation strategy, organizations can put controls in place to ensure compliance with external regulations and internal operating policies.

As the DOL fiduciary standard slowly rolls out, the most effective advisory firms will make strategic investments in the areas of surveillance monitoring and investment product selection. Ultimately, improved workflows will empower broker/dealers and advisors to serve their clients’ needs more efficiently.

Tina Lorenz is a CFA, and vice president and solutions specialist at InvestEdge. 

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.