Outside-IN

Outside-INblog

Outside voices and views for advisers

Higher investor protection standards ahead regardless of DOL fiduciary rule outcome

Advisers will need to be able to demonstrate they are recommending low-fee and high-performance products

Feb 8, 2017 @ 10:00 am

By Maria Cardow

+ Zoom

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.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 17

Conference

Best Practices Workshop

For the fifth year, InvestmentNews will host the Best Practices Workshop & Awards, bringing together the industry’s top-performing and most influential firms in one room for a full-day. This exclusive workshop and awards program for the... Learn more

Featured video

Events

Why the bionic adviser is the way of the future

The bionic adviser is the way of the future. We spoke with Simon Roy of Jemstep to get his insights on how technology will continue to impact the industry.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print