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These BDs Will Work to a Fiduciary Standard, DOL Rule or Not

By Rita Raagas De Ramos April 5, 2018

Broker-dealer advisors who spoke with FA-IQ say they will forge ahead with the execution of the steps they have taken to act as fiduciaries regardless of the fate of the Department of Labor’s fiduciary rule. These include new documentation to explain investments and changes to fee structures.

The U.S. Court of Appeals for the Fifth Circuit has ordered the DOL to vacate the fiduciary rule in its entirety. In the meantime, the SEC is proceeding with plans to craft a best interest standard for advisors.

Patricia Baum, an advisor at RBC Wealth Management, says what changed for the firm in the post-DOL rule environment was the type and amount of documentation needed when communicating with clients.

“We really have to make sure we document everything, and that changes the nature of your day a lot,” she says. “After every meeting you have to fully document everything. It’s great to have everything in writing but it does take a lot of time."

Before the DOL rule was partially implemented in June last year, Baum and other broker-dealers were previously held only to suitability standards, which required that investment advice merely be suitable to clients. But Baum and other Financial Times Top 400 broker-dealer advisors FA-IQ spoke with say they had been acting as fiduciaries long before the DOL rule was partially implemented.

Louis Cannataro, New York-based founder and partner at Cannataro Park Avenue Financial, which is part of the Northwestern Mutual Wealth Management network, says his firm also made changes related to certain new forms and procedures.

The firm’s compliance department is “acting as if the DOL is going through, and we are moving in the direction that, if it goes through, we’re right in line. If it doesn’t, once again, we’re ahead of the game,” he says.

Through documentation, advisors can protect themselves against potential litigation even if the investment products they recommend to their clients are not the cheapest in the market, according to John Frownfelter IV, the Oaks, Pa.-based managing director for investment product management at SEI Investments. The key is documenting the investment or fund selection process, including how the recommendations and conclusions were made, he says.

In the case of Princeton Wealth Advisors, which is part of the Raymond James network, the firm already completed a “total revamping” of its fee schedule for every client because it previously charged different fees for various asset classes.

This new uniform fee schedule will be retained whether or not the DOL rule stays, says James McLaughlin, Princeton, N.J.-based founder and branch manager at Princeton Wealth Advisors.

“Because we couldn’t have two fee schedules within Raymond James, we had to convert everybody to one fee schedule,” he says. “I think we’ve bit the bullet and we’ve done a lot of work, and I don’t think we’ll change anything at this point in time.”

Last year, Raymond James estimated the operational and IT changes needed to comply with the DOL rule will be in the “tens of millions of dollars” in addition to the millions the firm has already spent. Also last year, Deloitte estimated in a study commissioned by Sifma that broker-dealer firms and firms dually registered as broker-dealers and RIAs already spent more than $4.7 billion in preparation for the DOL rule’s June 2017 partial applicability date.

Christopher Cooke, Indianapolis, Ind.-based partner and senior institutional consultant at Cooke Financial Group, which is part of the Noyes network, believes the intention of the DOL rule – to serve the best interest of the client – will continue to be embraced by broker-dealer advisors because “it’s the right thing to do.”

Indeed, even at the first obstacle for the DOL rule – when U.S. President Donald Trump ordered its review for possible revising or rescinding in February 2017 – lawyers and analysts already said it would be difficult to reverse its impact on the retirement market, given there is already momentum toward a fiduciary standard.

Meanwhile, a survey of the Financial Times Top 401 retirement advisors shows that the top three changes they made to comply with the DOL rule were related to documentation, fees and training. The survey had 187 respondents with a median of $420 million in client assets. The survey was conducted by FA-IQ sister publication Ignites Research in January and February, before the appeals court decided on the DOL rule.

Specifically, 53% of those surveyed said they improved processes designed to explain their investment recommendations to clients, aimed at documenting their compliance to their fiduciary responsibilities. Around 40% said they eliminated the charging of commissions and converted all their accounts to either asset-based fees or flat dollar-based fees. Around 39% said they underwent training or started advisor training programs focused on fiduciary standards and duties.