Everywhere you look, there are articles on the new DOL rules and how they will impact commissioned advisers, registered investment advisers (RIAs), fee-only advisers and their clients. While the rules apply "only" to retirement plans, this includes individual retirement accounts (IRAs) and can also reach into unanticipated areas not obvious at first glance.
Let's take this particular sentence in the DOL's preamble:“Specifically, the final rule includes text that describes management of securities or other investment property, as including, among other things, recommendations on investment policies or strategies, portfolio composition, or recommendations on distributions, including rollovers, from a plan or IRA.”
Consider all of the potential areas of impact in just these few words:
• Management of securities
• [Management of] other investment property
• Recommendations on investment policies
• [Recommendations on investment] strategies
• [Recommendations on] portfolio composition
• Recommendations on distributions
• [Recommendations on] rollovers from a plan or IRA
This one single sentence encompasses every aspect of investment advice from investment policies, risk tolerance assessment, choice of investments and asset allocation to distribution strategies and rollover recommendations. The fiduciary requirement means the adviser must put the interests of their clients first. However, to document meeting these requirements will require investing in tools, services and procedures to show that all advice is within industry standards.
What kinds of tools and services should advisors be considering? For this discussion, I will break advisory tasks into three categories: pre-investing, investing and advice.
Pre-investing functions can include risk tolerance assessment, designing and recommending an asset allocation, coordinating investment goals with
financial planning and creating an investment policy statement.
Investing responsibilities are comprised of selecting funds, ETFs, stocks, bonds and/or other
investment vehicles for the clients' portfolios; determining an appropriate management strategy that considers rebalancing parameters, cash needs and tax implications; selecting a custodian (or custodians) based on clients' needs and preferences as well as "best execution"; implementing an effective and coherent portfolio monitoring and reporting system; and utilizing a timely methodology for monitoring and evaluating funds' (and other holdings) performance and management on an ongoing basis.
Advice services might encompass recommending an implementation strategy on 401(k) accounts (such as choosing between a target date fund, pre-selected asset allocation or hands-on management), advising on rolling qualified plan assets into an IRA, suggesting Roth conversion (or reversal) and developing a draw-down plan in retirement.
All of these financial services can impact and overlap between retirement and non-retirement accounts. For example, it might be improper to recommend an asset allocation for a 401(k) account without considering other investments held by the client. Likewise, analyzing a drawdown strategy would be incomplete without coordination with the client's non-retirement holdings and taxable income situation. In other words, the blurred line between retirement advice and non-retirement advice means that advisers must be very careful when providing any financial services post the DOL rule's effective date.
Sheryl Rowling is head of rebalancing solutions at Morningstar Inc. and principal at Rowling & Associates. She considers herself a non-techie user of technology.
