Expert: Fiduciary Rule Will Have Widespread Effect on Advisor Business

By Lynn Brackpool Giles

As executive chairman of fi360, Blaine Aikin has become a standard bearer for the fiduciary movement.

Since he joined the company in 2005, Aikin has risen through the ranks, helping to make fi360 a leader in fiduciary education and training for financial service professionals. During the same time, there was an industrywide call for greater advisory responsibility -- which recently culminated in the new Department of Labor (DOL) Fiduciary Rule.

The final edict “describes the kinds of communications that would constitute investment advice, and then describes the types of relationships in which those communications would give rise to fiduciary investment advice responsibilities.”[1]

Aikin and fi360 watched the rule’s development closely and were part of the financial community that provided comments and recommendations to the DOL from the first drafting stages.

“The DOL was good to their word,” said Aikin. “They took in comments and made changes to assist advisors with the rule’s practical implementation. It actually went further than I expected by doing away with a number of disclosures and with the restrictions it put on products under the Best Interest Contract Exemption (“BICE”).”

Aikin said he has also heard from advisors who have concerns about how the rule will ultimately affect practices.

“If you have been operating squarely on the fiduciary side, this is not a huge change,” he said “However, broker/dealers who are looking to offer variable-compensation products have many more challenges, now that they will be held to a fiduciary standard. Because of the specific requirements under BICE, products and processes will change dramatically, as will policy and procedures.”

The rule does not go into effect until 2017, but advisors should begin adapting their business models now to address the coming changes.

“The DOL reinforced through the rule what ‘fiduciary’ means,” Aikin said. “What they spelled out with the BICE elements lays out fiduciary best practices in many ways. Advisors who will be newly operating in this fiduciary environment will need training and a better understanding of what is involved in managing this responsibility.”

He adds, “They will need tools to implement the new elements in an efficient and productive manner, while documenting every step.” And not just in compliance.

“Advisors need to document processes so if [they’re] ever brought into question, they can show the quality of the process.”

Aikin feels that technology helps an advisor better navigate the fiduciary world.

“The fiduciary process involves taking information about a plan and the participant and then formulating an appropriate approach,” he said. “Technology platforms are built to take in client information and then take you through the steps of asset allocation analysis, investment policy statement development, potential investment analysis, etc. And, eventually, it helps monitor and report on the outcome.”

“Technology plays a huge role in organizing and documenting processes to show that sound investment practices were followed,” he added. This is crucial to exhibiting fiduciary responsibility.

Some industry experts are concerned that the rule will make it harder to service smaller clients – and they hope technology will keep down costs in these instances. Aikin points to the robo-advisor model that uses virtual tools to develop strategies for less complex client situations. Advisors can take a similar approach by using software to better understand their clients through account aggregation, online collaboration and accurate risk profiling.

Additionally, 401(k) rollover handling is now a fiduciary issue, with protocols for analyzing options and determining whether a rollover is in a client’s best interest. This can be done with a Q&A flowchart, Aikin said, but “in short order, it will become largely automated and, as a result, a more objective approach.”

He said there will be more compliance automation too, especially in the home office.

“The home office has the bird’s eye view of what’s going on in the firm in terms of products, services and due diligence being applied. They can monitor inappropriate activity, like too many plan distribution questions all coming back with ‘rollover’ as the answer.

“There needs to be a compliance overlay to watch the system and provide early warning of potential problems,” he continued. “There are many disconnected applications, and while there is various oversight on individual tools, this needs to be tied together to give an overview of the whole process.”

Looking toward the future, Aikin sees opportunities and challenges ahead for advisors working with plan sponsors.

“Plan sponsors need more education to better understand their fiduciary obligations and how to navigate these responsibilities,” Aikin said. “This may include delegating certain responsibilities to the advisor, which is an important opportunity. But the biggest hurdle is for those in a variable compensation environment. If they continue to operate in this way, they will have to use the BICE contract, which requires thorough due diligence. They will need to show that they are serving the client’s best interest, and products and services will need to be carefully vetted and documented.”

Aikin said this is critical from a legal protection standpoint -- and that technology systems can help manage these steps.

“I’ve spoken with DOL examiners many times, and when a regulator or litigator contemplates an action against a plan sponsor or advisor, they look specifically at processes,” Aikin said. This includes a step-by-step checklist for addressing issues, which quickly offers a sense of organization.

“Ultimately, the DOL looks for egregious or neglectful situations in which there is no professional level of care. But if they feel there are good checks and processes being followed, there is no incentive to dig deeper, and they move on.”

Fi360 is doing its part with its offerings, including a list of seven global precepts that outline the routines a fiduciary should follow.[2] “It complements the DOL rule and summarizes what every advisor should be looking for,” said Aikin.

Aikin knows that advisors will need to adapt to this new fiduciary reality or risk disruption to their practices.

“We are in a transformative time.”

[1] https://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html

[2]http://www.fi360.com/main/pdf/handbook_steward.pdf