When acting in clients’ best interest, RIAs may need to ramp up fiduciary compliance activities.
The new U.S. Department of Labor (DOL) rules imposing fiduciary requirements on professionals who advise on retirement accounts can have far-reaching effects. (To learn how broker/dealers can prepare for the April deadline, check out Morningstar’s Best Interest site.) Even though registered investment advisors (RIAs) who have always held themselves out as fiduciaries might believe that they are immune to these new rules, they actually now need to consider and document how they put clients' interests first.
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.”
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. So, what does this mean? In my opinion, avoiding conflicts of interest means more than simply not selling commission-generating products. Advisors must proactively ensure that every aspect of service related to retirement accounts is in the best interest of clients and, thus, ramp up their fiduciary compliance activities.
As an advisor, I am looking at how these rules might affect my own practice. Based on what I know at this point, I believe we will need to invest time and money into more robust processes and documentation in our advisory tasks, as broken into three categories: Pre-Investing, Investing and Advice, described as follows:
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.
Our fiduciary strategies: In the “Pre-Investing” category, it’s all about getting to know the clients, including their goals, risk tolerance, current assets and liabilities, tax situation, etc. Some of this knowledge is factual, such as investment statements, tax returns and mortgage balances. Other pieces are “soft,” which require meetings, evaluation, and analysis. In all aspects of pre-investing services, the advisor is faced with integrating the factual with the non-factual. We will focus on risk tolerance, asset allocation, financial planning and proposal generation.
For risk tolerance, we will be relying on quantitative risk tolerance assessment tools as well as integrating qualitative information from client meeting to truly assess clients’ ability to tolerate risk. For asset allocation models, as opposed to arbitrarily selecting asset classes and percentages for asset allocation models, due professional care requires analysis and documentation.