Five Easy Steps Toward Implementing the Fiduciary Rule

by | Dec 21, 2016 | Uncategorized | 0 comments

The Department of Labor’s fiduciary rule became effective in June with an implementation date that is now less than four months away. It is, of course, uncertain that the regulation will stay in place under the new administration. President-elect Trump has named Andrew Puzder as Labor Secretary, and he may wish to buy time to repeal the rule by deferring the implementation date. According to Barron’s, however, “delaying or repealing the rule could easily take a year or more.”[i]

Major financial services institutions have already made key decisions and launched the related systems, training, and client communications projects to meet the current April 10, 2017 deadline. Smaller banks may be less prepared.

We’re not qualified to offer legal or regulatory advice; if your company is affected by the new rule, we urge you to call in a compliance consultant. Nonetheless, as financial and operational risk managers, we’d like to offer a few practical suggestions to help you get started.

All firms that offer investment advice to retirement savers have to meet certain fundamental requirements by the implementation date:

  • Comply with the Impartial Conduct Standards set forth in the rule (act in the investor’s best interest, give no misleading information, and charge no more than reasonable compensation).
  • Notify investors that your institution and its advisors are acting as fiduciaries, and describe the firm’s conflicts of interest.
  • Appoint a person responsible for addressing conflicts of interest and ensuring compliance with the Impartial Conduct Standards.

The first step is to determine whether to continue offering commission-based products and services (Wells Fargo’s plan) or to convert to a fee-only basis (Merrill Lynch’s approach). This is a board-level decision, and the answer will depend upon such factors as the competitive environment and the bank’s ability to manage cultural as well technological and process changes under deadline pressure.

The second step is to appoint the person who will have ongoing responsibility for resolving conflicts of interest and monitoring advisors’ investment recommendations. In addition to technical competence, desirable qualities include strong communications and negotiating skills.

The third step is to assemble the project team that will analyze the business requirements and make any necessary changes to the firm’s document management, accounting, and client reporting systems.

A sound fourth step, in our view, is to confirm that your firm has current know-your-customer and suitability documentation for every client relationship. You can’t defend any investment recommendations without this information. Now is a good time to make sure it’s complete and up-to-date.

The fifth step can be initiated in parallel with the fourth one. It is to develop advisor training materials in two areas: how to explain “fiduciary status” to their clients, and what the Impartial Conduct Standards require of them.

If it remains in force, the fiduciary rule will massively change the financial services industry over the next few years. Certainly, it will squeeze the profitability of retail investment advisory services, and it may also foster the spread of robo-advising. In the short term, however, banks primarily face regulatory and operational risk, and hoping for a timely reprieve is not a prudent compliance strategy. These first five steps mitigate the risk of getting caught short as the implementation date approaches.

Philip Lawton, CFA, CIPM, is a guest blogger for Financial Risk Group.

[i] “Trump’s DOL Pick: Fiduciary Friend or Foe?” Barron’s, November 9, 2016.