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‘Befuddled’ Clients, Compliance Headaches Worry Advisors in Wake of DOL Fiduciary Rule

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A panel at the Envestnet Advisor Summit on Thursday addressed the concerns advisors have with the Department of Labor’s conflict of interest rule released April 6.

“Advocacy is a critical component of business success,” Clarke Camper, senior vice president for government relations for Capital Group, the parent of American Funds, said during the panel. He noted that his mantra in meetings with regulators on the rule was choice. “We need to preserve choice for investors and we need to preserve choice for advisors” on what business model they want to use.

He said his clients have raised issues with the rule’s potential to drive more firms to the RIA model.

“I think it’s going to accelerate macro trends toward an advisory model,” he said.

He said Capital Group’s fastest growing business is the fee-based group. 

Secondly, grandfather provisions in the rule mean pre-existing assets won’t be covered until the effective date of the rule. Grandfathered assets present several challenges, such as how to segregate grandfathered and new accounts and contributions, but Clarke said they are “eminently solvable.”

Brian Hamburger, founder, president and CEO of MarketCounsel, said investor confusion is one of the most significant issues the rule addresses, although “it may not be the best way to address it,” he said.

Investors don’t understand the distinctions between a broker and advisor, or fiduciary and suitability standards, he said.

The DOL has indicated it’s willing to tweak the rule in the coming months as it receives industry feedback, Hamburger said. 

“What this rule really does is create another standard of care” for different kinds of accounts, he said.

Pam Krueger, founder and CEO of WealthRamp, agreed that consumers are confused “and now they’re befuddled.”

Investors have always assumed their advisors were working on their behalf, Krueger said, so new regulations that require advisors to do so are confusing. 

Advisors have to dedicate some time to educating clients about what the fiduciary rule means for their relationship. “Education becomes the road to transparency,” she said. 

Krueger said, “This conversation is going to come up because it’s in the news and it’s in the headlines.” She encouraged advisors to proactively educate their clients on the fiduciary rule and the best interest contract exemption. However, she dissuaded attendees from wearing the “fiduciary label as a badge of honor” because “clients already think their advisor is a fiduciary.”

Lincoln Ross, executive vice president and head of product strategy and marketing and moderator of the panel, said Envestnet was focusing on technology and consulting to help advisors meet these challenges. The firm is taking a “consulting diagnostic approach” and reviewing enterprises’ advisory program to help them comply.

Ross said the “final rule versus the proposed rule has somewhat reduced the algorithmic complexity of the requirements,” with fewer calculations required and less intense documentation required. “There’s still a need and an opportunity for technology to support the best interest contract in the way advisors will present solutions to investors, gathering information about what an investor currently holds, and efficiently being able to describe how that current investment should be transitioned to a different solution that’s in their best interest.”

Enterprises have several things they need to do in the next several months to comply with the rule, Hamburger said. Fee-based advisors have “generously 30 to 60 days of work to take a look at client contracts, take a look at policies and procedures, marketing materials [and] staff training,” he said.

Since full enforcement of the rule won’t happen until January 2018, the presidential election “could really be disruptive,” he said.

Lawyers are the real winners in the fiduciary rule, Hamburger said, whether they’re litigating for investors or helping advisors comply with the rule.

In an interview on Thursday, Hamburger said he has “pretty low expectations on the SEC’s ability to engage in rulemaking,” and said that the agency should have come out with its own rule “years ahead of the DOL [which] probably would have negated the DOL even having to take this type of action.”

He said an SEC rule would probably have made the DOL rule “meaningless because it would have broader implications. It would also do more to cure investor confusion.”

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