Firms should expect that even if the DOL fiduciary rule is rolled back, they will be held accountable by regulators for higher standards of investor protection. They should still be thinking about whether they are offering the same products, using the same systems and recording the same-old data, which in today's complex investment environment is not enough. Advisers need to fundamentally rethink how they prove suitability with enforcement in mind.
Advisers will need to be able to demonstrate they are recommending low-fee and high-performance products.
Current operations and technology are insufficient to capture the multi-dimensional data needed to prove suitability of an investment for a specific client. Part of the problem is that the client investment profile is self-reported and sentiment-based, with investors filling out a standard five- to 15-question survey about how they feel about risk. There has to be a more quantifiable way to more directly take into account the client's risk profile.
Advisers might start treating investors as they currently treat institutions and run a basic credit check to understand the full financial situation of the individual. Rethinking the data sources that are used and expanding them beyond self-reported risk information would provide a deeper, defensible understanding of the client as a critical first step to proving suitability. These might include credit card transactions, mortgage details and other transactions and activities that give insight into a more holistic financial view of the client.
Risk profiles should no longer be binary or tertiary (low, medium or high risk); they will need to be multi-dimensional with a larger quantity of gradients for understanding risk. Once firms improve their data model for understanding the customer, this can be more tightly aligned to appropriate products.
Importantly, in addition to really understanding the risk profile of the client, the DOL rule implies the adviser needs to capture more data at the time of transaction. The adviser will need to be able to defend why the investment advice is suitable for that client. This could involve bringing in trading systems to take a snapshot of the market at a given point in time to understand how the investor's profile stacks not just against peers but within a larger market context.
Advisers could then develop a model with documentation around different grades and percentiles of appropriateness of an investment for a given client based on their goals, performance, market outlook and a number of other variables. Depending on the depth of technology used to support the suitability methodology, aspects of this process could be automated or powered by artificial intelligence.
Beyond the initial investment decision, the adviser will also need to defend holding or altering the position. Therefore, policies and procedures, process, technology and operations will need to define clear protocols for ongoing methods of checking in on the investment to prove suitability. This will allow advisers to defend their choice to leave a client in a certain product, even after the market had a major swing, because they've documented a process to prove continued suitability against investment goals. This could be a workflow that takes the initial investment research and product information and layers on an addendum with a real-time view of the market and documentation of an ongoing dialogue about risk profile and market risk.
As firms contemplate action in the face of a now uncertain DOL rule, defensible customer protection will need to be the center of their thinking. It needs to be included in every aspect of the advisory process, from onboarding to investment confirmation and beyond. With consumer protection the main goal of regulation, the reputational risk runs high for those who don't sufficiently think through how this rule will impact their global regulations.
Maria Cardow is director of business consulting at Synechron.