Kevin Knull’s 6 Parts of a DOL-Friendly Financial Plan

What’s the most prudent way advisors can act in their own best interest in complying with the Department of Labor’s best-interest advice rule? Create quality financial plans documenting and proving that the investment recommendations they make are indeed in their clients’ best interest.

So argues Kevin Knull, president of PIEtech, creators of leading financial planning software MoneyGuidePro, in an interview with ThinkAdvisor. Knull, a certified financial planner, discusses the Top 6 components of a top-notch plan, and more.

His new book, “Exploring Advice” (Create Space), is chock full of valuable insights and best practices to help FAs abide by the rule, scheduled for implementation next April. 

Included are separate chapters written by 39 other industry experts too – like heads of financial planning at Morgan Stanley and UBS, and wealth management executives at RBC and Raymond James. Knull’s own opinions are reinforced quantitatively by a survey he conducted of more than 1,600 financial advisors.

In the interview, he opines on how advisor compensation could change as a result of the rule — which requires FAs to adhere to the fiduciary standard for retirement accounts — as well as how he sees the role of traditional FAs evolving.

Before helming PIEtech, Knull simultaneously held several leadership posts at Symetra Financial.

Here are highlights of our interview:

THINKADVISOR: Why is a thorough client discovery process critical under the DOL rule?

KEVIN KNULL: Making sure that you really understand the client’s situation is the only way an advisor will survive the post-DOL environment. To act in the client’s best interest, you have to factor in their full financial circumstances, not just the typical seven or 15 risk-tolerance questions.

How does the rule essentially differ from FINRA’s know-your-customer rule?

On the spectrum, know-your-customer is at the far left end. It says, don’t provide bad advice. On the opposite end are the DOL conflict-of-interest rules established to ensure best-interest advice. They require you to understand your client. To not take the time, diligence and prudence to do that will subject advisors to unnecessary risk.

Where does the burden of proof rest?

Absolutely with the advisor. He or she must defend that their recommendations were in the best interest of the client.

How can that be shown?

A quality financial plan is the easiest and most prudent way to help document it.

What’s your definition of such a plan?

A quality financial plan should be goals-based, collaborative, dynamic, current, incremental – meetings with the client can be broken down into life stages, say – engaging and address issues relevant to the individual client or couple.

What are the main elements of a quality plan?

The first is Expectations: What the client is looking forward to in retirement, both physical and intangible desires; for instance, travel, spending time with family. The next category is Concerns: What are they worried about? Top concerns include running out of money and parents who need care.

What’s the third category?

Goals. The reality is that few advisors dig deeply into the conversation about goals, though that’s really what clients are saving for – to fund those goals. Almost all participants in our advisor survey said that 12 goals should be evaluated and discussed. But typically, the average advisor-driven plan includes only 2.7 goals. Where do health care costs enter the picture?

That’s the largest and only mandatory expense of retirement — and increasing at more than 6-1/2% per year. But very few financial plans include Heath Care specifically. If you don’t factor that in, how can you possibly invest a client in their best interest?

You write that Social Security filing strategies typically aren’t covered in financial plans. Why are they necessary to address?

For many Americans, Social Security is their largest source of retirement income. Yet very few advisors make a Social Security filing recommendation. Something less than 12% of financial plans include one. For example, the strategy of deferring Social Security income [to age 70] means a guaranteed 8% increase in income per year. Usually, it would be hard to demonstrate an 8% growth in income anywhere in the market.

What’s another key component?

Risks. The DOL says you must invest in accordance with the client’s risk tolerance. But this is more than just market risk. It’s inflation risk, longevity risk, mortality risk, time-horizon risk, liquidity, concentrated stock risk and so on. You need to consider all those risks.

What’s one big risk that FAs commonly ignore?

Very rarely does an advisor ask if the client has a health condition that would shorten their life expectancy. If they do, it should be contemplated before providing advice that’s in their best interest because if someone only has a three-year life expectancy, it doesn’t make sense to invest them in a long-term vehicle or a long-time horizon portfolio.