Advicent, the leading provider of financial planning software across the globe, has been closely monitoring the new Conflict of Interest Rule from the Department of Labor (DOL) since its first draft more than six years ago. This rule, much like similar legislation found across Europe, Australia, Canada, and elsewhere, was written in order to protect citizens (investors) from conflicts of interest when purchasing investment products — specifically in regards to retirement.
Since the rule’s inception, Advicent has taken the appropriate steps in anticipation of its implementation. We have hundreds of enterprise clients in the United States alone that would be impacted by this rule, so our knowledge and global experience must be readily available to our clients. In addition, our technology must be prepared for these upcoming changes, both in how our clients provide advice and whether or not our technology is impacted by the rule.
As a result, Advicent has developed The Compliance Blueprint, a three-part offering which includes unique DOL-ready financial planning software functionalities, a DOL Education Center, and consultant partnership services — all supported by decades of experience providing guidance and thought leadership to our clients through past regulatory changes.
Recently, Advicent has responded to—and assisted—a large number of enterprise clients and prospects in preparing for the impending rule. Additionally, The Compliance Blueprint was showcased to a variety of industry analysts and influencers, garnering a reaction similar to that of Will Trout, senior analyst at Celent: “[Advicent] seems to have the most DOL-focused financial planning software and messaging in the market. I really like the more strategic and logic-driven approach.”
During these demonstrations and following the most recent Presidential Election, Advicent has been approached with questions around the rule’s long-term life expectancy — especially with what appears to be antipathy from members within the incoming administration toward the rule. Advicent began to gather the thoughts of many industry leaders on the rule; how it can be rolled back; and whether or not this could be done in an expeditious manner.
We talked at great length with the fiduciary rule expert Kate McBride from FiduciaryPath and our internal team, who all hold the same belief: stay the course. Throughout these discussions, we uncovered two other major reasons regarding public expectations about why firms and advisors should stay the course in their DOL compliance strategies. Our position is, therefore, further ratified by not just one, but three major reasons:
The Conflict of Interest Rule will be too difficult to completely repeal at this point in the legislation process.
Since the election of the 115th United State Congress, we have seen a proposed law which would delay implementation of the rule until 2019. Many consider this a stall tactic for the administration to fully understand the rule and, ultimately, learn how to dispose of it efficiently and effectively. Prior to this legislation, but during the uncertainty, the position of Advicent has remained the same: continue compliance implementation strategy.
Trying to eradicate this DOL investment advice rule, however, will take some heavy lifting because presidents do not have unrestrained power to create or repeal regulations. McBride had this to say on the matter:
There are a handful of court cases pending in which insurance sales associations and broker-dealer associations have sued the DOL in an attempt to stop the rule. So far, three different judges in separate jurisdictions have opined that it is in the public’s interest that the rule be implemented without delay.
In addition, the new administration declared a delay in implementation of new regulations. That does not apply, however, to the DOL fiduciary rule because the rule is already in effect (since June 7, 2016). The DOL provided a “grace period” for compliance by firms that wish to continue work in the retirement space. Firms need to comply by April 10, 2017, with certain exceptions for which firms will need to comply by April 10, 2018.
The DOL fiduciary rule now has the force of law and cannot be delayed or repealed on a whim. Any action to delay the rule would require “notice and comment” and new economic analysis showing why the law should be changed. An attorney studying the DOL fiduciary rule cites an applicable court case, which affirmed that, “the Supremacy Clause of the Constitution gives force to federal action… The phrase ‘Laws of the United States’ encompasses both federal statutes themselves and federal regulations that are properly adopted in accordance with statutory authorization.”
So, while some firms may take a “wait and see” approach, many have already invested time, effort, and money into preparing to comply with the rule.
From my perspective, as someone who analyzes fiduciary firms’ investment fiduciary processes for certification by The Centre for Fiduciary Excellence, it makes sense to “stay the course” with a fiduciary process for a number of reasons.
The DOL fiduciary rule accelerated a migration toward fiduciary status that has been in motion for years. While there have always been investment solutions that can be leveraged in a diversified portfolio to help fiduciaries meet client obligations, more and more are being launched in response to the rule. Compensation is coming out of the product and the intermediary is being paid on a professional basis for advice, not products.
This shift is positive because contrary to what some in the industry believe, while the BICE contract will allow commission income if the recommendations are in the best interest of the investor, third party compensation of any kind (to firms or advisors) will trigger a prohibited transaction. Therefore, anyone who holds themselves out as an advisor—making recommendations—is a fiduciary.
The DOL Conflict of Interest Rule has moved too far through the legislation process to be completely repealed prior to implementation. Additionally, many firms across the country have invested a lot of time and money in changing processes and implementing software to become compliant. Therefore, due to the global shift toward a more client-centric financial services industry, this regulation will not disappear quickly.
The fiduciary standards illuminated by the DOL rule are now something consumers will expect, if not demand.
Since the rule was in its draft form, many investors (think retirement savers) began to learn more about what it means for their advisor to be a fiduciary and why it matters. With this, the consumer is more aware of the importance of fiduciary advice. One of our colleagues, Matt Marcum had this to say on the matter:
After the 2016 presidential election, results showed a win for the Trump/ Pence ticket and control of both houses of Congress by Republicans. With these results, there seems to be a renewed optimism among some financial industry insiders that the DOL Conflict of Interest Rule could be repealed or significantly revised. Regardless of whether of the rule is repealed or not, it is still clear that the public is now expecting a higher level of service from financial professionals and firms have already invested a lot of time and money in making adjustments for these shifting expectations.
He goes on to explain why FinTech—in this case, NaviPlan—is more than simply a tool for compliance but also for profitability:
At Advicent, we believe financial planning is a core component not only for the upcoming DOL legislation but for establishing a trusting relationship between advisor and client. A holistic financial plan establishes goals, defines time horizons, and keeps the priority on long-term goal achievement instead of day-to-day market fluctuations.
Beyond our vested interest in providing financial planning tools to advisors, studies have actually shown that providing financial plans to clients has helped RIA firms grow their AUM faster than firms that do not.
Think about that: RIA firms that already conform to a fiduciary standard are seeing that financial planning and financial planning technology help to both increase their assets under management and have led to a positive net client change.
McBride went on to explain the impact of consumer awareness of the fiduciary standard:
The public, seeing the discussion that’s taken place in the industry regarding the rule, has read or seen coverage on major networks, and they are phoning RIA firms and asking for fiduciary advice. That’s unprecedented, and it won’t go away — even if the rule does.
Firms that are moving to comply with the DOL Rule have publicly announced that they are doing so. It would be a “PR nightmare” to take that back. But the thing that sometimes gets lost in the discussion is that the DOL fiduciary rule is actually good for firms and advisors over the long term. Acting in investors’ best interest leads to better investor outcomes. For those fiduciaries advising them, that is much steadier revenue—and it means when clients’ assets grow, revenue does as well—even when it must be reasonable. With a fiduciary practice that is efficient, consistent, and prudently applied, assets can be gathered more easily. So firms and advisors who wholeheartedly embrace the fiduciary rule will thrive.
In short, we anticipate a move toward fiduciary advice driven by client expectation – the logical next stage of the Consumer Revolution. So, regardless of whether or not the rule is implemented, firms will have to provide better advice; more holistic advice; fiduciary advice to its clients.
Key expectations of meeting the rule such as holistic financial planning, compliance workflows, improved record keeping, and transparency are best practices regardless of regulation.
It is clear that these best practices will play a key role in DOL compliance strategies for many financial services professionals. Firms will need to deliver proof that they are providing credible advice that is in the best interest of their clients. Planning software and other FinTech tools will make this easier to accomplish and keep these records if they are needed in the future. Rachel Schlawin of Advicent stated:
The most common question I have heard: “What is the bare minimum my firm can do to be compliant?” Asking this question has led to an observable push for a specific tool to immediately alleviate all DOL worries. Many firms are seeking a “snap on” solution that can be implemented quickly so they can rest assured that they will be compliant in every situation.
Let us take a step back, however, from this line of thinking and consider what it is we know about the financial services industry and regulation — they are often overwhelmingly complex. How is it that pushing a single button could possibly mean the end to concern over DOL compliance?
I would challenge financial professionals and the firms they represent to think on a larger scale when it comes to the fiduciary rule. I think that deep down firms know that snapping on a single tool is simply not going to cut it.
Schlawin goes on to explain the importance of a truly holistic approach to DOL compliance:
I would argue that DOL compliance must begin with a holistic approach — redesigning your entire workflow and ensuring that you have the systems and checkpoints in place to guarantee a repeatable process that produces deep documentation around the client-advisor relationship. Yes, this may mean purchasing and implementing new technology that fills in gaps and becomes that missing puzzle piece in your workflow. More realistically for many, this means reassessing and implementing an entire process centered around your overall DOL strategy.
Over the course of the last year or so, Advicent had the opportunity to truly demonstrate the power of our technology, especially NaviPlan. When prospects and clients alike reviewed our technology—in light of the rule—it became increasingly clear that we are the market leader in this space. More so, this was demonstrated by our 50-year track record. We were able to offer technology immediately, without promises for future compliance tech, due to our longstanding market leader position.
During this time, firms of all sizes began to see the value in technology capabilities like data collection, comprehensive planning, scenario manager, transparent client reporting, recommendation rationale, complete documentation, compliance workflows, and progress reporting. Firms began to really understand two key things: 1) workflow management and 2) big data. The DOL rule shed light on how firms could better manage their distribution of advice and more importantly, how it was consumed.
Considering all this, “staying the course” is the right thing to do. It is not about meeting regulatory expectations; it is now about providing the consumer with holistic financial advice through comprehensive planning, and, managing workflows, advice delivery, and the data to improve efficiencies, as well as ultimately increasing profitability.
