Going Live With Fiduciary Changes Takes Time

A new analysis from Broadridge Financial Solutions urges firms to formally map out their response to the Department of Labor (DOL) fiduciary rule prior to execution.

In other words, it’s not just enough to understand what changes need to be made to comply with the stricter fiduciary standard—it’s also crucial to plan for how such changes will be implemented, step by step. As the Broadridge analysis explains, there are multiple key dates to keep in mind when rolling out any new products, service approaches, etc.

Prior to the preliminary implementation date of April 10, 2017, the analysis urges firms to be absolutely sure they have adopted and tested any new recordkeeping and compliance tools to adhere to and track fiduciary exposure. There is some lag-time programmed into the rule to ease compliance, but post-April 10 is not the time to learn one’s solution will not be effective in real practice on the ground. There is also the task of creating and distributing fiduciary acknowledgment letters and updating intranet and public websites.

According to Broadridge, two of the most urgent needs firms are wrestling with after digesting the DOL conflict of interest rule “center on their current business operations—specifically, an evaluation of their fund lineup and re-engineering their current process for share class conversions.”

“For firms who distribute funds through a distributor network, job one is looking at their current fund lineup and performing an in-house assessment of their compensation practices,” Broadridge urges. “Will they remain status quo or do the BIC [best-interest contract] exemption? If they are doing the BIC exemption, what data will they need to screen funds to offer the most suitable ones for their downstream investors?”

The other big effort, coming out of this, will be share class conversions, Broadridge predicts.

“In the post-DOL era, share class conversion has become a major concern. Firms need a simple, clear, and bullet-proof approach to assess the current share class of a fund against the most optimal classes available to convert,” Broadridge argues. “Tools for advisers and correspondents can provide clear paths for conversions, including documentation and archival of the recommendations.”

NEXT: Adapting to the interim period and beyond 

This is all work that should be signed off by the initial April 10 deadline, the analysis suggests. Advisers and staff, by this point, should be trained on any new enterprise point-of-sale utilities to mitigate conflict of interest and ensure proper disclosure moving forward under the rule. Finally, depending on the advisory practices and the services offered, there may be separate disclosures going to self-service and on-demand investors, and advisers must establish workflows to maintain and archive transactions on all fronts.

During the interim period from April 10, 2017, through January 1, 2018, Broadridge suggests advisers will have to be ready to create and distribute fiduciary acknowledgment letters for new accounts. Advisers leveraging the best-interest contract exemption or attempting to “grandfather” existing accounts will have to be ready to formally execute such policies. They will also have to start proactively managing any new fiduciary risk by analyzing and benchmarking fees against the market.

Broadridge goes on to predict major change and disruption for the individual retirement account (IRA) side of the market, especially as it pertains to rollovers from defined contribution plans to IRAs.

“What happens when a client leaves his current employer for a new job?” the analysis asks. “In the pre-DOL rule world, an adviser would help the client rollover assets into an IRA. In the post-DOL Rule world—where recommendations must be documented and potential conflicts of interest disclosed—it is no longer a simple ‘lift and shift’ … Moving a client into different share classes or different funds can result in higher fees which need to be clearly communicated and signed off by the client,” if not avoided entirely.

Broadridge concludes that complying with the DOL rule “offers an additional marketing touch point with your clients,” and an opportunity to strengthen relations.

“The fiduciary acknowledgement letter, BIC disclosure, and updating intranet and public websites are a few things you’ll need to create and refresh,” the analysis warns. “Updated training materials are also critical to educate advisers on new processes for ensuring suitability, capturing signature, and archiving recommendations. Data is critical to feed these communications, preferably aggregated from a single definitive source.”

The full analysis is available online here.