Navigating the Complexities of the DOL Fiduciary Rule: A Call for Prudent Financial Practices
By Adam Deathe
In a recent conversation, wealth industry experts came together to shed light on the intricate requirements of the latest DOL fiduciary rule. The dialogue underscored the pressing need for financial advisors and firms to embrace rigorous standards of prudence, loyalty, and transparency to protect clients and maintain compliance. Here are the key points of discussion:
The Foundation of Regulation Best Interest (Reg BI)
For those committed to Regulation Best Interest (Reg BI), the path is clear: be prudent, loyal, avoid overcharging, and uphold honesty. These principles are not just regulatory requirements; they are essential to fostering trust and integrity in financial advising.
Retrospective Review: Beyond Procedures
The DOL’s retrospective review framework is designed to test the substance, not just the existence, of a firm’s compliance processes. It’s a call to ensure that procedures are not mere formalities but are effective and comprehensive in practice.
Handling Violations Under 84-24
Addressing violations under the 84-24 guidelines requires more than just notifying clients. Insurers or broker-dealers must instruct independent producers to notify the regulator, pay any resulting excise taxes, and submit the appropriate forms. For repeat offenders, additional corrective actions may be necessary. The essence of this requirement is clear: demonstrate that you correct errors and learn from them.
IRA-to-IRA Rollovers: Documentation Over Disclosure
While the DOL no longer mandates disclosure for IRA-to-IRA rollovers, firms must still document internal recommendations to comply with Reg BI. This internal documentation ensures a transparent and accountable advisory process.
Custodian Changes and Portfolio Sales
The practice of selling a portfolio only to re-purchase it under a different custodian, thereby incurring fees, raises red flags. However, merely adjusting paperwork without financial impact is generally acceptable. The focus should always be on the client’s best interests.
Preserving the Integrity of Financial Education
Education remains a crucial tool under the new rules, but it must remain purely educational. When a call-center provides education, for example, it must avoid slipping into giving specific advice, which crosses into recommendation territory.
Correcting Disclosure Failures: Timing and Compensation
Timely correction of disclosure failures is crucial. If a failure results in a loss, the advisor must compensate the client. The loss calculation typically involves comparing what the client would have had without the breach to what they ended up with due to it, ensuring any increased expenses are covered.
Undoing Commissions: Tailored Solutions
Addressing commission breaches lacks a one-size-fits-all solution. Each situation must be individually assessed, with the primary goal of making the client whole again.
Navigating Unsolicited Sales
When dealing with unsolicited sales, particularly from pre-existing relationships, advisors must act in the client’s best interest. This involves understanding the rationale behind the client’s request, assessing cost differences, and thoroughly documenting the interaction. Advisors should counsel clients and avoid blindly following requests without proper analysis.
Regulatory adherence, transparency, and prioritizing client interests in all advisory actions remain of paramount importance in the wealth industry, and, by embracing these principles, financial advisors and firms can navigate the complexities of the DOL fiduciary rule and uphold the highest standards of integrity and trust in their practice.