RIAs expect to make some changes to comply with DOL fiduciary rule

They will need to marginally modify their policies and procedures, adjust client agreements and other documents, as well as provide additional client disclosures

Apr 11, 2016 @ 4:18 pm

By Liz Skinner

Brokers aren't the only ones who will have to make changes as a result of the “best interest” rules on retirement advice that the Department of Labor issued last week. Changes are also in store for registered investment advisers.

Even though RIAs already are held to a fiduciary standard, something brokers will now have to do when giving retirement advice, they will need to marginally modify their policies and procedures, adjust client agreements and other documents, as well as provide additional client disclosures, advisers said.

The considerable and costly compliance changes that some feared after viewing the proposed rule, though, were avoided under the final rule. The regulation would boost the advice bar for brokers, who currently only have to ensure their recommendations are “suitable” for clients, rather than in their best interests.

“We are going to have to have more specific operational and procedural rules around conversations with clients about their retirement accounts,” said Michael Kossman, chief operating officer at Aspiriant, a Los Angeles-based RIA.

For instance, if a client asks his adviser to look at the particulars of his 401(k) plan, an account the adviser hasn't been involved with previously, the adviser is going to need to stop and make additional disclosures to the client about fees the firm might charge, versus fees that are part of the plan, Mr. Kossman said.

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It also seems that new procedures may be required for discussions with prospective clients about the comprehensive services RIAs provide because those talks would include retirement assets, too, he said.

Robert Gerstemeier, who has an eponymous firm in Lisle, Ill., said he expects to need additional documentation for individual retirement account rollovers.

“It will require more disclosure showing how we put client interests first,” Mr. Gerstemeier said.

Many other questions remain, such as whether the additional documentation and calculations needed to show best interest will need to be retained at the firm level or for each individual client.

Advisory firms will want to get it right because enforcement for this rule will play out in the courts.

“We live in a litigious world and at some point markets are going to go sideways or a particular client situation is going to go sideways and someone in the industry is going to get sued,” Mr. Kossman said. “We all need to have good policies and procedures and systems to show we followed the rule.”

(More: Coverage of the DOL rule from every angle)

Some experts wonder if the rule will boost the number of fiduciary advisers in the marketplace and put pressure on RIAs to reconsider how they show their value and what they charge for advice.

“RIAs will have to make their pricing variable,” said Lou Harvey, chief executive of DALBAR, a research and consulting firm. “Fees will have to reflect the service and scope of services in the price they charge.”

Fees on simplistic investments, such as an S&P 500 Index mutual fund, are going to have to go down and those on complex investments will be able to increase, he said.

“There will need to be a differentiation on the part of the RIA simply because their competitors will have different pricing.”

Most RIAs, though, do not agree at this point that fee changes will be necessary.

(More: Advisers evaluate the DOL fiduciary rule)

Mr. Gerstemeier, who is a former chairman of the National Association of Personal Financial Advisors, said he doesn't expect to have to make any changes to fees.

Ray Ferrara of ProVise Management Group, which is a hybrid adviser, said after his firm makes the procedural and contract changes, he doesn't expect the rule will require ongoing changes.

“The DOL removed a lot of what would have been burdensome,” he said, mentioning cost projections and website changes that the proposed fiduciary rule would have required.


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