Fiduciary Corner

7 actions to demonstrate compliance following the DOL fiduciary rule

These moves will help structure your firm to meet the Department of Labor's conflict-of-interest regulations

May 3, 2016 @ 1:54 pm

By Blaine F. Aikin

Sales and advisory organizations are fundamentally different. That is the premise of the Labor Department's new conflict-of-interest rule. They have different priorities, which shape the culture and practices that exist in each. Consequently, they must be regulated differently and should be distinguishable to the public.

Advisory firms (whether in law, medicine or financial services) must be structured to optimize client outcomes, even as they seek to operate profitably. Sales organizations are structured to maximize profitability, even as they seek to produce positive customer outcomes. The priorities of these businesses are reversed. Advice is inherently a fiduciary function, sales is not.

YOU'LL NEED EVIDENCE

The conflict-of-interest rule is intended to help make sure professional advisers operate their businesses to optimize client outcomes: They must deliver objective, competent advice by design. If your actions as an adviser are ever brought into question, you will need to be able to show evidence of well-defined, consistently applied decision-making processes that are grounded in fiduciary principles and deeply ingrained in the culture of your business.

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

The final rule makes concessions to allow firms and their representatives who have operated in a sales environment to adapt more readily to fiduciary obligations. It does so through the introduction of the “best interest contract exemption,” or BICE. It is the new prohibited transaction exemption that allows advisers to receive variable compensation for products they recommend, so long as they accept fiduciary accountability and follow certain procedures to help assure clients' best interests are served.

There are three things you need to know to truly understand the BICE and the overall rule. First, variable-compensation structures provide incentives for advisers to compromise clients' best interests in favor of their own. Second, advisers who receive variable (conflicted) compensation must implement extra investor protection measures by entering into a BICE arrangement with clients. And third, all retirement advisers — regardless of how they are compensated — must meet fiduciary duties of loyalty, prudence and care.

BICE AS BLUEPRINT FOR ALL

While reliance upon the BICE is only required for advisers who intend to take compensation in the form of commissions or transaction fees, the procedures de¬lineated for the exemption reflect best practices that all advisers should routinely follow. Essentially, the BICE provides a blueprint for the structure investment advisers should have in place to demonstrate compliance with ERISA fiduciary obligations. These seven actions align with what the BICE and the rule generally require.

1. Tell your client you are a fiduciary adviser. This must be accomplished by a formal contract in most circumstances under the BICE, but you can otherwise acknowledge your fiduciary status in your engagement agreement with the client or in regular account documentation.

2. Make sure you and the client are on the same page with respect to what you will do for them. Present in no uncertain terms, in writing, the scope of the services to be rendered. This engagement agreement should define the services to be provided, as well as those which are to be specifically excluded.

IMPARTIAL CONDUCT

3. Implement “impartial conduct standards.” This is a defined concept in the DOL rule. These standards are formal obligations to serve clients' best interests, to charge only reasonable compensation and to avoid misleading statements. These standards should be reflected in each advisory firm's compliance manual.

4. Have policies and procedures in place that are designed to prevent violations of the impartial conduct standards. Exceptional due diligence processes for the selection and monitoring of products and service providers are absolutely essential.

5. Avoid all sales incentives and any form of inducement that may compromise the quality or objectivity of your advice.

6. Disclose all compensation, conflicts, and fees and expenses relating to the client relationship and the advice you render.

7. Set up a protocol that will subject your firm's decision-making processes to scrutiny.

Also set up a peer-review process within your firm or with other colleagues you respect to evaluate client cases.

Blaine F. Aikin is executive chairman of fi360 Inc.

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