Changes by the Department of Labor to compliance laws have caused a shake-up in the financial advising industry. Changes from suitability standards to fiduciary standards are representing a huge shift in the industry. Suitability standards meant that as long as the investment recommendation met the needs of the clients, your services were considered adequate. However, fiduciary laws now state that financial advisors are legally obligated to act in the best interest of their clients’. Fiduciary laws no longer allow a financial advisor to simply find a “suitable” choice – you must find the best choice.
As mentioned above, fiduciary laws mandate that financial advisors act in the best interest of the client. This means that all fees and commissions requested by the financial advisor must be disclosed to their clients in a dollar amount. On top of this, you must provide a written disclosure agreement in situations where a conflict of interest may exist. These disclosure agreements are called the Best Interest Contract Exemption (BICE).
Many services that you provide are affected by these laws. Fiduciary laws cover the following plans: defined-contribution plans, four types of 401(k) plans, 403 (b) plans, employee stock ownership plans, Simplified Employee Pension (SEP) plans, savings incentive match plans (simple IRA), defined-benefit plans, and individual retirement accounts (IRAs). In other words, your practice as a financial advisor applies to the fiduciary laws.
The Impact on Your Practice
According to a survey by Fidelity in 2016, more than half of investment advisors are expected to increase the amount of time spent toward compliance. Furthermore, changes to reach DOL compliance would cost the financial service industry approximately $2.4 billion dollars annually. However, these rules will prevent abuse by financial advisors. According to a report by the White House Council of Economic Advisers in 2015, abuse from financial advisors drained approximately $17 billion dollars annually from retirement accounts. Although the cost for DOL compliance may seem excessive, there are several benefits for clients. While you practice by the law, there are other financial advisors who may not. Fiduciary laws protect the clients of these individuals.
Actions to Reach DOL Compliance
State your role and services. Always state your role as the financial advisor in all formal documents such as written disclosure forms. In written documents, state the scope of your services. Include any compensation, fees, and expenses relating to the relationship with your clients. Not mentioning your services in dollar form violates DOL compliance and fiduciary laws.
Implement impartial conduct standards and policies that prevent violation of these standards. Impartial conduct standards are formal obligations to serve the client’s best interest. You state that you will charge a reasonable compensation and that you will avoid misleading statements. These standards should be stated in your compliance manual.
Implementing policies, procedures, or changes can prevent the violation of these standards. The selection and monitoring of your products and services are crucial to meet compliance.
Meeting fiduciary laws are important to keep your practice up-to-date. Failing to meet these requirements will affect both the sustainability of your practice and your clients alike.
Genivity is here to help. We place emphasis on helping advisors with goal-based financial planning that incorporates health wealth factors to provide personalized reporting. Genivity can assist you in determining the future costs of care, and provide you with more information needed to plan for future retirement. To learn more, sign-up for a demo with Genivity’s HALO.