Outside voices and views for advisers

Where retirement advisers should focus their preparations for the DOL fiduciary rule

The fact that the impartial conduct standards are the sole requirement of BICE during the transition period speaks volumes to their importance to retirement advisers

Jun 8, 2017 @ 6:00 am

By Blaine F. Aikin

It's now official: On June 9, the Department of Labor's fiduciary rule will take effect. The heart and soul of the rule, and the part on which all retirement advisers should focus their preparations, is the requirement to have and follow "impartial conduct standards."

ICS is a construct associated with the most important new prohibited transaction exemption established by the fiduciary rule: the best-interest contract exemption. When the DOL, under the direction of the Trump administration, imposed a delay in the initial applicability date for the rule from April 10 to June 9, it also deferred all requirements of BICE — except for the impartial conduct standards — until a final applicability date of Jan. 1, 2018.

Requirements for the advisory firm to establish an enforceable contract with the client, provide specific disclosures, assign oversight responsibilities to an identified individual, notify the DOL of reliance upon BICE, establish procedures to manage conflicts of interest and retain records are all deferred until the final applicability date.

The fact that the impartial conduct standards are the sole requirement of BICE during the transition period speaks volumes to their importance. They reflect core fiduciary principles, whereas the deferred obligations are the prescriptive rules that help assure fulfillment of those same principles. The DOL's actions reflect its commitment to preserve core fiduciary principles at a time when practical and political realities required flexibility in deciding how and when supporting protocols will be imposed.

ICS requires three things: comply with a best-interest standard, charge only reasonable compensation and avoid misleading statements. These are simple, yet powerful, obligations that require retirement advisers to do more than be philosophically aligned with the concepts involved. Conformity to these principles requires implementation of policies and procedures that become engrained in the advisory firm's business practices.


To comply with the best-interest standard, the fiduciary rule requires advice to be individualized, prudent and consistent with a duty of loyalty. Prudence (a duty of care) and duty of loyalty are the two core obligations associated with fiduciary relationships.

Individualization is a defining characteristic of all professional advisory relationships; understanding the circumstances and needs of the client is a prerequisite for formulating trustworthy and competent advice. Advisers must consider such things as the client's objectives, risk capacity and tolerance, and needs in retirement. Advisers must also consider the implications of prevailing circumstances such as retirement-plan features and options, and market and economic conditions.

Prudence as articulated in the fiduciary rule translates directly to the prudent-person rule, which is well established under trust law. It requires the adviser to act with the care, skill, prudence and diligence that would be expected of a competent and ethical professional adviser under like circumstances.

Advisers must formulate, implement and consistently follow prudent practices designed to assure reliable fulfillment of this high expectation. Such practices would include applying thorough due-diligence procedures in the selection of investments and service providers, diversifying investments to properly manage risk and return, and adhering to other generally accepted investment theories.

The duty of loyalty centers on avoiding conflicts of interest or mitigating unavoidable conflicts in a manner that serves clients' interests. It requires disclosure of costs, conflicts and other information that would reasonably influence client decision-making. Loyalty also generally entails ongoing monitoring responsibilities consistent with reasonable client expectations and governing document provisions.


The second overall obligation of the impartial conduct standards, to receive no more than reasonable compensation, is assessed in relative terms. Compensation must not be excessive relative to the value of what is delivered to the client and based upon the facts and circumstances involved.

Many factors can come into play in evaluating the reasonableness of an adviser's compensation. Quantitative benchmarking of fees and services to compare an adviser's compensation relative to the competitive marketplace can be used to demonstrate reasonableness, but qualitative factors also can be important. Those may include consideration of the education, experience and specialized expertise the adviser may bring to the relationship and apply on the client's behalf.


The final ICS obligation enumerated under the rule, to refrain from making misleading statements, is largely self-evident. Fiduciary relationships are grounded in trust. False and misleading statements undermine trust, violate the duty of loyalty, and can rise to the level of fraud under securities regulations.

Advisers must not make misleading statements about investments, investment transactions, compensation, conflicts of interest or other matters that can materially affect decision-making. Firms should have training and oversight systems in place to ensure accurate client communications.

While the term "impartial conduct standards" is grounded in the fiduciary rule governing retirement advice, it captures core obligations of investment fiduciaries serving all types of financial advisory relationships. Formal policies, procedures and practices designed to assure high standards of professional conduct should be well-established in every advisory firm.

Blaine F. Aikin is executive chairman of fi360 Inc.


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