Recently, the U.S. Department of Labor (DOL) finalized a new standard broadening the definition of who constitutes a “fiduciary” under the Employee Retirement Income Security Act (ERISA).
This controversial move is causing insurance and other financial services brokers to rethink their business models as well as the way they communicate with their customers.
Before the new rule, which has an applicability date of April 10, 2017, financial advisors for 401(k) plans and IRAs who are considered “brokers,” defined as registered representatives of a broker dealer paid commissions by the investments they recommend, have been held to a “suitability” standard when it comes to the duty they owe clients. This meant that when a broker recommended that a client buy or sell a particular security, the broker must have a reasonable basis for believing that the recommendation is suitable for that client. The suitability standard allowed brokers to recommend an investment product that paid them a higher commission as long as it was suitable for the client, even though it may not be the optimal choice from the client’s perspective.
The new DOL rule places brokers under a “fiduciary” standard, which means they must put their client’s interests ahead of their own in recommending investments. That is a big change.
The new standard puts brokers in the same camp as investment advisors registered with the Securities and Exchange Commission or individual states (Registered Investment Advisors), who were already held to a fiduciary standard. The change strikes at the heart of the business model of brokers, who typically get paid through commissions, unlike registered investment advisors, who are paid a percentage fee based on the amount of plan assets under management.
The new standard strikes at the heart of the business model of brokers, who typically get paid through commissions, unlike registered investment advisors who are paid a percentage fee based on the amount of plan assets under management. (Photo: iStock)
Multiple business challenges
Compensation isn’t the only challenge brokers face with the new rule. The heightened duty will apply to any information brokers provide to customers, in print or digital form, that might be deemed a “recommendation” under the rule.
A factsheet provided by the DOL describes a “recommendation” this way:
“A ‘recommendation’ is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation.”
In other words, every broker customer communication will now need to be audited to determine whether it constitutes a recommendation, and modified if it would violate the new standard. That won’t be an easy task.
Customer Communications Management will play a critical role
Customer Communications Management (CCM) processes will be essential for complying with this new rule. Adding personalization to communications is a huge advantage to the advisor, but it is now critical to have a process for reviewing these personalized communications to confirm that they conform to the new legal reality.
CCM becomes even more important to a successful strategy considering the efficiency and control that can be gained by centrally managing this content. Scattered, decentralized communications processes will make it far more likely that an advisor will send noncompliant content to a customer, exposing the company and the advisor to risk.
Going forward, it will be critical to have a process in place for reviewing personalized customer communications to confirm that this messaging is in compliance. (Photo: iStock)
Considerations for effective compliance
Here are a number of questions to consider when it comes to identifying potential obstacles to compliance:
Are there legacy CCM systems in your infrastructure? Many insurance agencies and other brokers use legacy systems to generate their customer communications, which makes it costly and time-intensive to modify them to ensure compliance with the new rule. IT departments have the skills to make the needed changes, but not the time or full expertise to review and audit the updated customer communications.
Where is your customer information stored? If it resides in multiple departmental systems, there is greater risk that advisors will send noncompliant communications to customers unless these systems are coordinated.
Can you review every communication channel? Consider whether existing CCM processes and systems are flexible enough to incorporate compliance review for today’s wide range of communications channels including mobile, email, web pages and social media.
When in the CCM process will compliance review take place? Ensure that compliance officers and other regulatory personnel are engaged early in communications creation and automate approval processes to speed time-to-market and create audit trails.
How will multiple communications be perceived by the customer? Analyze how customer activities are supported by different channels in the organization. Channel communications may be intertwined from a customer’s perspective, but managed separately within the organization. Achieving compliance will require understanding how they appear to the customer.
Achieving compliance and ensuring positive customer experiences
With the new DOL rule, brokers will want clear guidance about what constitutes a recommendation so that they can effectively communicate with customers in a compliant way. Addressing the foregoing questions will help organizations identify strategies that enable brokers to personalize their customer communications so that they can differentiate from the competition, while at the same time ensuring that compliance review is integrated into CCM workflows in a manner that is effective, but does not hinder time-to-market for critical customer communications.
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