By Knut Rostad
Originally posted on Financial Planning on June 9, 2017
It’s June 9, and the DoL fiduciary rule has arrived – sort of. The cornerstone of the rule, the Impartial Conduct Standards, effectively becomes part of any engagement not explicitly grandfathered. This is good.
The Impartial Conduct Standards mean advisers must adhere to the best-interest standard and the prudent investor rule. Conflicts must be avoided or managed to serve the client. (Drive-by disclosure alone won’t pass muster.) Reasonable compensation is required and misleading statements are prohibited. The Impartial Conduct Standards are rigorous. They are not for sissies. They are especially necessary for small individual investors who are dependent on their retirement savings.
In the coming months, the DoL will gather additional input from the industry and the public to review the rule and offer changes. What this review will mean is today unknowable. What is knowable are DoL Secretary Acosta’s statements sympathetic to criticisms of the rule.
The problem for fiduciary advisers and investors is that the playing field will not be level and compliance with the rule will not be even between firms on day-one. Different views of the rule – and whatever it becomes by Jan. 1, 2018 – will persist. When and how it will be applied is sure to differ.
Many brokers believe they’re ready, according to a Wealth Management survey of IBDs. Reps rank their firms’ preparation level at 8.97 on a 10-point scale. (This could be akin to the fictional Lake Wobegon where “all the children are above average.”) A “10” is “outstanding.” a “1” is unacceptable.
Also, 80% of the reps “think of themselves as fiduciaries” and 78% report getting “training around new procedures.” (Reps in the survey had no objective way to assess their fiduciary status; it’s their opinion.) Yet, 42% of reps’ revenue is commissions. The upshot: reps generally believe they are fiduciaries and prepared for the DOL Rule – without much of an objective basis to say so.
“Acting in the best interest of the client” is a fiduciary barometer and reveals differing views of “conflicts.” The brokerage industry tends to suggest, for example, conflicts are normal and okay and “best interest” requires merely identifying and disclosing them.
John Taft, a former Chair of SIFMA, recently reflected this view when wrote it “allows clients access to the same products and services they get today,” irrespective of the costs and conflicts that may be embedded in the product recommendation.
Meanwhile, scholars, jurists and experts’ draw their views from the roots of the Investment Advisers Act of 1940 and or trust law and treat conflicts as a danger. Academic and adviser, Ron Rhoades, represents this view and has written volumes, such as his recent blog, http://scholarfp.blogspot.com.
Carlo V. di Florio, then Director of the SEC Office of Compliance and Inspections, in 2012 offered a succinct 31 words on conflicts, “Conflicts of interest can be thought of as viruses that threaten the organization’s well-being…. And if not eliminated or neutralized, even the simplest virus is a mortal threat to the body.”
June 9 was just the start of a multi-year effort to create a fiduciary culture. Rule changes and new interpretations are inevitable. Crucially, vast differences in experience between RIAs and brokers will mean different practices and uneven compliance. This is a given. Yet, rest assured that BD messaging will be smooth, clear and ubiquitous. Think, trust, trust, trust and best interest, best interest, best interest.
Here’s what fiduciary advisers can do to level the playing field as investors evaluate your firms and other brokers and advisers. Stand apart. Focus on what you do; not what you say. Focus on your practices that matter to investors. Put them in writing.
Here at the Institute for the Fiduciary Standard, we’ve published the 12 best practices. Here they are in a nutshell: 1. Be a fiduciary always – at all times. 2. Put agreements in writing. 3. Be reasonable. 4. Show clients what they pay and what the firm gets in all fees. 5. Avoid conflicts – or fervently mitigate them. 6. Avoid principal trading, unless a client insists. 7. Avoid advice tied to commissions – or explain honestly, get informed consent and mitigate the conflicts. 8. Avoid gifts, entertainment. 9. Have baseline knowledge, education, and competence. 10. Use an IPS. 11. Control investment expenses. 12. Affirm compliance with all 12 Best Practices – in writing.
Today we begin writing the next chapter of the fiduciary movement. A movement now bolstered by market forces and greater investor awareness. This is all to the good. Still, success is not assured. Movements can falter or grow and flourish. To flourish, the central role of fiduciary advisers must stand out. Advisers who publicly explain what they do – and what others will not or cannot do – must provide major contributions to this chapter. Investors can only hope that they do.