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How to Get Your Practice DOL Fiduciary Rule Compliant
If you are a financial advisor there is one thought that may be keeping you up at night, “Am I DOL Fiduciary Rule complaint?” While some of the most controversial aspect of the rule have been delayed again, some areas of the rule are already law and require some action if you want to remain compliant. At Financial Advocates we are actively consulting with all of our member advisors towards ensuring DOL Fiduciary Rule compliance. If you are not partnering with a third-party compliance expert, it can be overwhelming. Here is a simplified break down of the various aspects of the rule and what you can start doing today to prepare for compliance.
Advisors can charge no more than “reasonable compensation.”
“Reasonable compensation” is rather ambiguous, isn’t it? What exactly does this mean? In a nutshell, you need to ask yourself if you can justify the fees you charge. The solution to this riddle is to take the ambiguity out of the equation. How do you remove ambiguity? You have a documented client service model that outlines your value proposition and fee schedule. The client service model is a replica of how your practice operates and includes all of the services you, and your staff, are responsible for providing your clients. If, while going through the process, you identify that many of your services are not tangible, it might be time to explore adding ancillary services to your offering including financial planning, retirement projections, etc. You could also consider benchmarking your fees and services against independent sources to determine if it is considered reasonable.
Advisors must act in the “best interest” of their clients.
If you are not yet an independent advisor, this aspect of the rule should be driving you towards making the change. Before this rule, proprietary products could well be suitable for a client, but were they in the client’s best interest? If you are a captive agent and limited to the products and solutions you can deliver, how can you ensure they are in your client’s best interest if you are unable to explore an expanded universe of options outside of your financial institution?
Aside from going independent, documentation is critical here. Most firms are creating new forms for advisors to document their reasoning behind their recommendations. Form or no form, each new recommendation you provide should be accompanied by the steps you took and the rationale behind for your recommendation.
Advisors can educate their clients as to their 401(k) rollover options, but should not advise.
Most 401(k) and employer sponsored benefit plans operate with minimal fees to participants. When a client decides to rollover their 401(k) into a rollover IRA or Roth managed by an advisor, fees often increase which can create a conflict of interest. The DOL has determined that this may not be in the best interest of clients. However, there are many scenarios when it’s appropriate for an advisor to educate their clients on different investment options or withdrawal options that may not be available in their employer sponsored plan.
So how do you ensure compliance with the rule? If you have a client who decides to rollover their 401(k) after educating them on their distribution options, it’s imperative that you have them sign a document stating the roll out was their decision.
Advisors must have a prudent process around their recommendations.
Never before has documenting your workflow and process been more critical to your practice. When it comes to portfolio management, it is critical to have your process for building investment portfolios in writing. If you outsource portfolio management, you can rely on your third party money manager to provide you with the required documentation to satisfy this requirement. If they are unable to provide you with a documented prudent process for their investment strategy, it may be time to consider finding a new partner. However, you recommendation to hire a new outsourced portfolio manager is a fiduciary recommendation under the new DOL rule, and you must document a prudent process on why you recommend them.
Satisfying the actions outlined above will better prepare you for the enforcement provisions of the rule if and when they are passed. Remember the central theme to ensuring compliance is to have established processes in place for your practice and to document everything. If you are not yet using a CRM system, this too is critical to your continued success. CRM systems allow you to track and document each client interaction and communication.
While it may seem overwhelming, it is, in fact, an opportunity to improve your practice and provide better service to your clients. There are also options available to help you manage the burden, including partnering with a firm like Financial Advocates.
This article is for informational purposes only and is not intended as authoritative guidance or legal advice.