New federal rules on retirement accounts set to take effect in April have wealth managers working to ensure they can prove they are acting in their clients’ best interests.
The U.S. Department of Labor’s Conflict of Interest Rule is commonly referred to as the fiduciary rule because it requires advisors to act as fiduciaries. That means advisors must avoid conflicts of interest or be transparent about them by, for example, explaining why advisors are recommending a higher-cost investment and disclose if they will receive a commission for doing so.
Financial advisors who charge clients commissions are deciding whether to stick with that model — which could mean risking lawsuits — or, like Bank of America Merrill Lynch said it would do in October, eliminate commission-based individual retirement accounts altogether. That means potentially losing some customers unable to afford the fees charged based on a percentage of portfolio assets.
Many fee-based wealth managers who are already held to the fiduciary standard as a result of becoming registered investment advisors with the Securities and Exchange Commission are preparing for the rule, too.
Carolyn P. Taylor is president and founding partner of Weatherly Asset Management LP, a Del Mar-based registered investment advisory firm.
Taylor said the firm is enhancing its technology and conducting trainings ahead of the April 10, 2017, deadline.
We continue to educate ourselves and try new ideas,” Taylor said, by attending panel talks and tuning in for webinars, and spending time and money to ensure the right people and procedures are in place and that the firm continues to review technology to stay abreast of potential enhancements.
Ashley Copp, a wealth investment advisor with Weatherly, said the firm will adjust internal and client communications to ensure recommendations are being provided within the framework laid out by the Department of Labor.
Weatherly, founded in 1994, has 12 employees, 320 clients and about $580 million in assets under management.
Clear Compliance Standards
Farther north along the coast at Solana Beach-based Blankinship & Foster LLC, director of wealth management Jon Beyrer said the changes aren’t going to be “too significant” because, like Weatherly, the firm launched with a fee-based model when it was started in 1989.
Still, a benefit of the DOL rule, Beyrer said, is that it gives specifics on how to be in compliance with the fiduciary requirements.
“Since we have heightening disclosure rules, the conversation (with clients) will be a little more specific,” he said.
When previously a conversation would have taken place, now that interaction “will be a lot more formal and it will be in writing,” he said.
Templates will be built into the firm’s customer relationship management software; advisors will be required to show they’ve followed a sequence of steps when providing someone saving for retirement with an investment recommendation, he said.
Blankinship & Foster manages assets worth $450 million. Most clients have assets of at least $1 million, although the firm has come up with ways for people with less than that but high earning potential to pay via a retainer or subscription model.
He said the demand for the fee-only model has been accelerated by savvier clients.
“Consumers are more aware, they’re smarter and they’re doing more research,” he said. “There’s definitely a demand. People want objective advice.”
However, it’s unlikely other models will be eliminated altogether as the fees charged by wealth management firms aren’t affordable to all retirement savers.
“The brokerage houses are always innovating and bringing new products to the market,” he said, “and for lower net-worth people, investing $5,000 or $10,000, our model doesn’t really work well for that.”
While some companies have announced they will cut commissions, independent broker-dealer Cetera Financial Group recently said its advisors will continue to earn commissions and fees for work on clients’ retirement accounts. Still, the company has said changes will be necessary to ensure advisors are compliant with the new rule.
Tech to Play a Role
A San Diego-based enterprise software company is among those offering firms services to ease the path to compliance.
Craig Dunham, general manager of financial services at Del Mar-based enterprise software company Seismic, said firms believe enforcement of the rule will come through class-action lawsuits.
“Generally speaking, people are looking for guidance on how to best meet the standards the Department of Labor has laid out,” he said.
Seismic has about 55 employees in San Diego.
More than half of Seismic’s customers, of which there are more than 200, are financial services firms, including 10 of the top 25 institutions in the United States as measured by assets under management, according to the company.
Of those, 30 are wealth managers. Most of those are using the new features developed in response to the DOL’s rule, he said.
“They want to be sure they have the right documentation in place to validate what they’ve been recommending,” Dunham said.
For the firm, founded six years ago, adding additional features to its platform to assist with compliance was “a natural extension of our capabilities,” he said.
The company is offering “tools that help to document what’s been presented and how it’s been presented,” he said.
Validation, Documentation, Training
The DOL standards spell out the type of communications that will be considered investment advice and the type of advice that will be considered a recommendation — the line the rule draws when defining whether advice being provided is of a fiduciary nature.
Dunham said the firm’s core principals when it comes to its fiduciary rule “solution” are validation, documentation and training.
“Some clients are excited about the opportunity and are doubling down on going after the retirement planning market,” Dunham said. “Other firms just don’t want to be bothered and they’re getting out completely.”
Technology, such as the tools provided by Seismic, are one way firms are mitigating the risk, he said.
Will New Rule Stand?
The firms preparing to comply with the rule were thrown a loop this month with the election of Donald Trump. The president-elect has pledged to roll back some federal regulations.
“We’re watching closely to see if this new rule is either overturned or if implementation of it gets delayed,” said Beyrer with Blankinship & Foster. “If we’re not required to start documenting it, we probably won’t do it.”
He believes “it’s pretty possible” the Trump administration will change the staff at the Department of Labor and that the new hires will delay implementing the rule.
“We’ve made our preparations to comply with the rule by April should it take effect, but we haven’t started implementing it yet,” Beyrer said.
Taylor, with Weatherly, said the firm will also soldier on until it hears otherwise, but may maintain some of the changes being made even if rumblings about the new administration’s dislike for the rule results in its reversal.
“We’ve put a team of people in charge of making sure we incorporate the DOL ruling in a timely way, and we’re continuing to think that the proposed rule will be effective in April until told differently,” she said.
The firm plans to have prepared flow charts detailing client scenarios by the first quarter of 2017 and to follow that up with training on the new procedures.
“Even if there is a bit of a rollback or reversal, we will likely keep new steps in place because we feel it’s in the client’s best interest to act as fiduciaries, as we have been,” she said.
FIDUCIARY RULE TIMELINE
April 8, 2016: Final rule published in the Federal Register
April 10, 2017: Compliance with investment advice standards required
Jan. 1, 2018: Compliance with exemption requirements required
