Your fiduciary practice: life after the DOL rule

As wealth management evolves, you should look to evolve with it. Investors are demanding a fiduciary standard which may require you to thoughtfully consider how you run your business. 

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Operating as a fiduciary

Building portfolios as a fiduciary requires deep understanding of your clients’ objectives in order to appropriately balance the risks and costs they may face. You may need a defendable and repeatable process to answer the pivotal question:

Is this decision in the best interest of my client?

Fiduciary Practice

Not an all-inclusive illustration of the components of
the portfolio construction process used by
a financial advisor.

Objectives: This process starts with a deep understanding of a client’s specific objectives. When you spend the extra time to help them make better financial decisions, you solidify your relationships and demonstrate the value of the fees you charge. BlackRock has resources to guide you through these conversations and to assist you create a transparent, documented process. Lay the foundation with our objective-setting worksheets.

Risks: It’s important to contemplate portfolio risk in two dimensions: How much risk should be taken, and what types of risk are tolerable in the portfolio. These two questions should be used dynamically when working with clients to regularly align their objectives with the amount of risk they are willing to take to achieve them. Discover how we see and
analyze risk
.

Costs: Portfolio costs come in two categories: fees (transaction costs and management fees) and taxes. Each of these eat into the returns a portfolio generates. Advisors that build a documented cost budget into their portfolio construction process can limit the impact of this erosion and ensure they are incurring costs only when justified. Learn how to capture the best value across investments.

Sep 28, 2016

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    You’ve heard it before … eat right … exercise … get regular check-ups. And you know that, to be healthier, you SHOULD do those things. But what if there was a regulation that said you MUST do those things. The Department of Labor fiduciary rule underscores the importance of understanding your client’s personal and financial retirement objectives and building a portfolio based on that shared understanding.

    As ERISA fiduciaries, advisors will need to demonstrate the value of the services they offer for the fees they charge … and it starts with meaningful personal relationships and deep understanding of client circumstances. Because these circumstances are what drive their financial objectives. When you look deeper, spend the extra time with clients … when you help them make better saving, spending and investing decisions … you solidify your client relationships, make them clients for life and demonstrate the value of the fees you charge.

    *Research from Morningstar shows that investors who make intelligent financial planning decisions achieve better outcomes. They call it portfolio “gamma.” And, as a fiduciary, working to deeply understand client objectives … and regularly affirming those objectives ... may be the most important thing you do with clients. This is where you can add significant value … or gamma … to the client relationship.

    Consider a process where you start by understanding the future purpose of the client’s money. Why are they investing? How much to they need? In what timeframe?

    Then, assess different actions a client may need to take over time in order to achieve their desired goals. Do they need to work longer, spend less, or modify how they’re investing?

    You and your client need to know their current cash flow to help determine how much … or how much more … they can save and invest. And, if retirement is the primary goal, understanding future cash flow can be more complicated.

    Part of complying with DOL’s new regulation is having a documented process … that is transparent … to help address each client objective.

    If your firm has a form for this, please use it. However, if not, BlackRock has resources to guide you through your process – including several worksheets that you can access here – to help you demonstrate your value proposition, add gamma to your client relationships AND meet your obligations as a fiduciary.

Understanding the DOL rule

The Department of Labor's (DOL) fiduciary rule, also known as the “conflict of interest” rule, extends fiduciary status and responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA) to a broader range of services relating to retirement assets, including IRAs.

  • As a fiduciary under ERISA, it is important for advisors and their firms to be able to demonstrate that each recommendation they make is in the best interest of the client.
  • At its core, the rule is intended to increase protections for individual investors by ensuring advisors are acting in their client's best interest and by addressing conflicts of interest.

Many wealth management firms are providing advisors with specific resources regarding the DOL rule. Regularly consult with your home office or legal counsel for guidance on the rule’s impact.

Read the full rule and exemptions here.

When will the DoL rule apply and what does that mean?

The fiduciary standard within the DOL fiduciary rule goes into effect on June 9, 2017. Full implementation of much of the detail of the rule has been delayed until January 1, 2018.

The delay will allow the DOL to receive further comments from the public and conduct additional analysis on the best way and the timeframe to implement this fiduciary standard. Furthermore, the SEC has recently sought public comment on the appropriate standard to be applied across all investment accounts, which may impact the rule’s full implementation.

    • In the transition period between June 9 and January 1, advisors are required to adhere to an “impartial conduct standard” for retirement accounts, which requires them to provide investment advice in the investors' best interest, receive no more than reasonable compensation and avoid misleading statements to investors about recommended transactions.
    • Between now and January 1, the DOL said it will not pursue claims against fiduciaries who are working in good faith to comply while it conducts an economic and legal analysis of the rule’s impact.

What does it mean to be an ERISA fiduciary? Are there exceptions under the rule?

ERISA fiduciaries must comply with ERISA’s prohibited transaction rules or operate under specific exemptions where available. In other words, simply disclosing or receiving consent for the conflict will not make it permissible. Intermediaries who are fiduciaries are precluded from receiving compensation that varies depending on the investment product or program, absent a specific exemption.

  • Absent an exemption, prohibited transactions under ERISA include:
    • Dealing with client assets for a fiduciary’s own interest or own account.
    • Acting on both sides of a transaction.
    • Receiving any consideration for a fiduciary’s own account in connection with a transaction involving client assets.

The fiduciary rule does contain key exemptions, and one is particularly important:

  • The Best Interest Contract (BIC) Exemption allows ERISA fiduciaries to receive otherwise prohibited payments (i.e., receive variable compensation) provided that the advisor meets certain conditions and adheres to an “Impartial Conduct Standard.”

To rely on the BIC and provide advice relating to IRA accounts, an advisor and firm must:

  • Act in the client’s best interest and charge reasonable compensation.
  • Not use inappropriate incentives to favor certain products or services.
  • Provide extensive disclosure of all payments received from providers.
  • Not prohibit clients from engaging in class-action litigation to resolve claims. 
  • Enter into a written contract which contains these terms and more.

The disclosure and contract requirements will not be enforced until January 1, 2018.