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Regulation and Compliance > Federal Regulation > DOL

To the rescue: Ex-coast guard pilot pitches DOL rule revamp

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The Department of Labor’s fiduciary rule has faced a barrage of industry condemnation since its unveiling last April. One of those giving a thumbs-down may, at first glance, seem a bit far afield: a former search and rescue helicopter pilot for the United State Coast Guard.

In fact, that critic, Don Trone, founder and CEO of the consulting firm 3ethos, is regarded as one of the most influential people on the topic in the retirement, financial planning and investment advisory worlds. And for good reason: He’s devoted the last 28 years of his second professional career to developing fiduciary best practices.  

Related: The DOL fiduciary rule, duties to consumers, and the Best Interest Contract Exemption

Trone’s views on the DOL rule — and what needs to replace it — got a full airing at a general session during the National Association of Insurance and Financial Advisors annual conference, held in Las Vegas Sept. 17-19. The view behind his critique — that the DOL rule is misguided — echoed testimony he delivered in August 2015 before the Department of Labor’s Employee Benefits Securities Administration.

“These rules are going to make it easier for bad advisors to hide behind the complexity… and make it harder for honest advisors to provide their services,” said Trone (pictured below). “The greatest harm is going to come to small retirement plans, retirement savers with small account balances, and small retirement advisory firms.”

Punishing regulations

A fundamental flaw of the DOL rule, Trone said, is its imposition of punitive regulations intended to force compliance with a principle: the rule’s best interest standard. Instead what’s needed, he argued, are “fiduciary practices” to satisfy the principle.

These fiduciary practices, which existing legislation, regulations and case law have  “substantiated,” can be put into checklists, an exercise with which Trone has extensive experience. 3ethos’ CEO has developed and expounded on such checklists in numerous books, speeches and training programs conducted for tens of thousands of advisors, trustees and investment committee members.

The to-dos of one worksheet Trone recapped at the NAIFA general session — identifying asset risks, time horizons and expected outcomes; defining and ensuring that a strategy is consistent with these variables; and (among other practices) conducting periodic examinations for conflicts and self-dealing — underpin three pillars of Trone’s fiduciary philosophy: leadership, stewardship and governance. These concepts are fundamental to the Global Financial Steward (GFS) designation issued by the Leadership Center for Investment Stewards.

Related: Fee-only RIAs still need to monitor fiduciary rule exposures

Cutting-edge research

The GFS is based on a new body of research Trone began developing in 2007 when he took an 18-month “sabbatical” — 20 years after his last operational mission for the Coast Guard — to head the newly established Institute for Leadership at the U.S. Coast Guard Academy, a leadership think tank.

Trone’s pet project at the institution: To understand why the Coast Guard responded so successfully to Hurrincane Katrina (the organization rescued 24,500 people after the storm) whereas other first-responders struggled. The most recent product of this endeavor, “Leader Metrics: What key decision-makers need to know when serving in a critical leadership role,” published in 2014, is, in Trone’s telling, unique in scope.

“There are tens of thousands of books on leadership; nearly an equal number on governance, decision-making and project management; and, a handful on stewardship,” said Trone at the NAIFA general session. “This is the first book to integrate the three subjects of leadership, stewardship and governance.”

The successful application of the three disciplines — collectively dubbed behavioral and inspirational governance or BIG — will be crucial to “elite” insurance and financial advisors in the decade ahead because of the increasing “legal, financial, professional and moral liability” they will bear as fiduciaries for their clients.

Related: On NAIFA’s plate: tax reform, SEC rule, state retirement plans

Trone said BIG expands on behavioral finance — the study of the behaviors, economics and financial factors underpinning the decision-making of individual investors — by also factoring in the behaviors of those who oversee and manage their investments: advisors, trustees, directors, officers and senior managers.

The field’s origins date back to antiquity. The greek philosophers Socrates, Plato and Aristotle, said Trone, could divine much about an individual, group or society based on their core values, behaviors and decision-making process. Great individuals in the life insurance space — Trone cited industry legend Norman Levine, who passed away in 2015 and was honored at the NAIFA conference — as distinguished in their ability to balance these elements.

Under the Department of Labor’s new fiduciary rule, these skills will be at a premium — for a lot of people. Trone pegged the number of investment professionals acting in an investment fiduciary capacity at 8 million; collectively, they manage 80 percent of the nation’s liquid, investable wealth.

Related: Compliance support for advisors will be key with DOL fiduciary rule

Improving the process

The health of the U.S.’s private wealth, said Trone, is entirely dependent on a successful governance process that can “substantiate” a fiduciary or global wealth management standard for agents and advisors. One problem with the new fiduciary rule, says Trone, is that it fails to include the governance and stewardship principles he views as key to successful client engagement.

“The DOL rule does more damage than good,” said Trone. “What the department has done is to maximize the number of people who will be subject to a fiduciary standard, but in so doing they have minimized the standard. That’s why the industry needs a new professional standard of care — BIG.”

Related: Not ready to become a DOL-compliant FI? Go partner with one

Trone said that the DOL rule speaks only to “procedural prudence:” fulfilling the documentation and disclosures of the rule’s best interest contract and (if paid variable compensation) BIC exemptions. Behavorial and inspirational governance, in contrast, entails additional behaviors that “amplify and improve a decision-making process” for (as it relates to advisors) crafting a retirement plan recommendation. Among these qualities: being competent, courageous, compassionate, aligned, adaptive, attentive, analytical, authentic and accountable.

A component of Trone’s elevated BIG standard is “neurogovernance,” a concept that embraces the “physiology of the brain and the heart” or the complex analytical and emotional factors that guide investment decisions.

“One of the mistakes [advisors] make in giving presentations to clients is to try and overload them with complex skills, knowledge and vocabulary used in the industry,” said Trone. “We think if clients know everything we know about the complexity of the industry, they will trust us more. Not true.”

To become true fiduciaries, Trone added, advisors must free themselves of the industry’s “arcane lexicon and vocabulary” and become “behavioral and governance coaches” for their clients. To wit: applying the behaviors of the BIG standard — not punitive and bureaucratic rules of the DOL fiduciary rule — to helping clients realize their clients’ retirement goals.


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