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5 Questions Every Firm Should Ask About DOL Fiduciary Rule

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The financial services industry is in the midst of the most significant change in the more than 40 years since Congress passed the Employee Retirement Income Security Act of 1974 (ERISA).

As America’s workers assume more and more responsibility for their retirement, the U.S. Department of Labor is poised to expand the application of standards on fiduciary duties for advisors and brokers. The intent is to better protect investors while building in more accountability for the firms that sell and the companies that provide retirement products. The rule may require that advisors working with certain retirement accounts be subject to a different fiduciary standard, which means being held to a higher legal standard to act in the best interest of clients.

At Nationwide, we’ve been working closely with the DOL and others to ensure consumers at all income levels continue to have access to advice and products they rely on to prepare for and live in retirement. At the same time, we’ve made it a top priority to prepare for the rule so we can meet the retirement needs of savers.

The new rule means financial professionals are going to have to adjust by taking on new responsibilities and considering changes to their business model. Advisors – and the industry – will be analyzing and adapting to the rule over the next several months. As our company assesses the application of the rule, we’ve identified five key questions we believe every financial advisor and financial services firm leader needs to take into account as they evaluate the new requirements.

1. Has your firm reviewed its compensation practices?

For both firms and advisors, compensation practices considered acceptable under the current fiduciary standard may be prohibited. One such example is commission differentials on similar products. The receipt of differential compensation by firms or advisors may be problematic under the final rule. Other practices, such as the receipt of indirect compensation, also may be impacted by the final rule. The DOL requires that compensation be reasonable relative to the service provided.

What should you do? Proactivity pays — a thorough review of compensation practices, with appropriate action plans where required, will allow firms to position themselves more quickly for compliance.

2. Will your firm utilize the Best Interest Contract Exemption?

This is an important issue for commission-based firms who sell products that constitute registered securities under federal securities laws. This exemption as proposed by the DOL has extensive warranty, disclosure and compliance requirements. The proposed exemption’s written contract requirement does not allow any waiver of class action rights by the investor. Advisors who wish to continue receiving commissions for the sale of these types of products should consider seeking legal guidance on how best to meet these compliance requirements. Firms that opt out of the Best Interest Contract Exemption may have to consider other options, like a fee-based model, in order to comply with the rule.

3. Are you familiar with the other proposed exemptions and carve-outs and how they may apply to current or future business processes?

While no one knows the exact details of what the final rule will look like, the proposed rule contains, in addition to the BICE, an amended exemption and several carve-outs. It is worth closely examining these exemptions and carve-outs to determine if any of these may provide an appropriate path forward from a compliance or opportunity perspective. Engaging your legal and compliance partners to assist you in navigating through the exemptions and carve-outs in the proposed rule will be valuable time spent now and hopefully reduce the amount of time spent on compliance issues on the back end. 4. How is the firm educating and training its advisors on the impending rule changes?

Advisors operating in the retirement space (retirement plans and IRAs) who are subject to the complexities of the final rule will need substantial training and education, particularly in light of the ambiguities created by having multiple regulatory schemes apply, in most circumstances, to the same sales transaction. Informed and educated advisors will be those who both understand the fiduciary rule and how their firms intend to comply, including potential changes to their business model, selling practices and compensation.

5. Has the firm reviewed its compliance and surveillance practices?

Firms and advisors that engage in activities subject to the rule will be held to a standard of care higher than what they have seen in the past. Both firms and advisors need to manage risk of noncompliance. The ability to consistently and comprehensively document advisor recommendations and sales activity — what was considered, what was recommended and why — will help firms and advisors manage their fiduciary responsibilities.

While the specific answers to these questions and many others will vary from organization to organization, we’ve found that pulling together a diverse, cross-functional team has been helpful when working through complex issues like the ones noted above.

In our view, firms that are able to quickly address these issues will be able to differentiate themselves from competitors and more seamlessly help their clients navigate the retirement planning landscape. With market volatility and global economic factors placing pressure on retirement savings, advisors and savers will be hungry for guidance that complies with the new rules to optimize their strategies.

We owe it to the hardworking savers across the country to help them manage these complex issues and do so in a way that complies with both the letter and spirit of the expanded fiduciary standards. It won’t be easy, but we are dedicated to do what it takes to help Americans plan for and live in retirement. We owe them no less.

– Related on ThinkAdvisor: RIAs, Reps Plan to Drop Small Clients Under DOL Fiduciary Rule: Fidelity


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