Why Advisors Should Act Like Fiduciaries With or Without DOL Rule

It's what their clients expect now, according to a panel of investment consultants at the TD Ameritrade annual LINC conference

No matter what the Trump administration decides to do about the Department of Labor's fiduciary rule, financial advisors should abide by the spirit of the regulation. (President Donald Trump on Friday ordered the DOL to delay the implementation of its fiduciary rule.)

That was the sentiment of a panel of investment consultants on Thursday discussing the impact of the DOL rule on the investment process at this week’s TD Ameritrade LINC 2017 conference.

“The cat is out of the bag,” said Joe Cortese, senior consultant at at DiMeo Schneider & Associates. “Clients are now more educated about potential conflict of interest rules.”

They are paying more attention to transparency about fees and investment products, and that will continue even if the DOL doesn’t persist with the rule, said Jean-David Larson, director of regulatory and strategic initiatives at Russell Investments.

None of the five members of the panel, led by Scott Egner, manager of managed account sales at Ameritrade Institutional, suggested that advisors should count on a delay or repeal of the rule, which is due to take effect April 10 although Larson noted that this is a “time of ambiguity.” 

(Related: Trump Tells DOL to Halt Fiduciary Rule; Dodd-Frank Targeted)

As ThinkAdvisor’s Melanie Waddell has reported, President Donald Trump is expected to issue an order directing the DOL to delay its fiduciary rule by six months or a year and has appointed an acting secretary of Labor while confirmation hearings for his chosen Labor secretary, Andrew Puzder, have been delayed.

In the meantime, panelists who spoke to an overflow crowd at the LINC conference offered several recommendations for advisors to comply with the rule:

Cortese recommended three “D” procesess to insure compliance with the fiduciary standard:

  • Define what you’re doing for the client
  • Document your initiatives and solutions, including why you chose particular investments
  • Defend your decisions using that documentation

Kevin Malone, president and founder of Greenrock Research, advised, that whatever investment choices an advisor makes on behalf of clients need to be “clearly stated. Disclosure is the critical thing.”

“Everything is up for review,” said Egner. “Low cost doesn’t mean it’s the right choice for the client.”

It’s also important to show how a particular investment fits into a portfolio, according to Egner. “Have you documented that?  It’s not how much is paid for it as long you support it.”

“But fees need to be reasonable,” said Cortese.

Even a 401(k) rollover into an IRA — which would require exemption from the fiduciary rule using a Best Interest Contract Exemption (BICE) because it’s expected to cost more than the 401(k) plan — can improve the quality of a client’s investments if the client couldn’t access that asset in his or her 401(k) plan, said Joe Taiber, managing partner at Taiber, Kosmala & Associates.

Rollovers, 12b-1 fees and even fee structures that treat cash different than investment capital are “hot potatoes” under the DOL fiduciary rule, Taiber added.

One advisor this reporter spoke to in the room said his firm, which had not been charging clients for their cash holdings, now includes those assets in the total assets on which it levies its fees, based on the advice of the firm’s outside attorney.

Advisors who don't want to manage clients' assets can choose to outsource investment management services, but then they must do their due diligence on that outside provider, said Taiber.

In either case. the investments should be “appropriate to a client’s investment needs,” said Malone. “That’s the standard. If a client needs more income than the portfolio can provide, you have to tell the client that.”

Most important of all, said Larson, is what is the client is actually getting out of the relationship with his or her advisor. “That goes beyond investments. We think advisors add 3% to returns,” said Larson, noting that it’s not just a matter of additional gains but also the avoidance of bad decisions.

Cortese recommended that advisors visit the DOL website to read about the fiduciary rule. "It's worth your time."

--- Related on ThinkAdvisor:

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