The advisor practice should be prepared to add new procedures and technology platforms to support the DOL operating environment. The requirements of an advisory practice to support DOL comprehensively will involve the capabilities and technologies described in the sections below.
Many agencies and advisory firms employ a form of Client Relationship Management (CRM) platform in conjunction with the practice. For many firms, however, the DOL will likely dictate a more comprehensive use of such a platform than many firms currently employ in operations. In the field, the CRM will be required to document prospect and client communications, since most communications can be construed as “recommendations” under the DOL and the advisor must avoid any recommendation that contains “misleading statements.” As such, the advisor and staff will likely have to thoroughly document these communications as a requirement of the Financial Institution and make the content discoverable and accessible in the event of a dispute or legal action.
Maintenance of Content on a “System of Record”
The advisor practice will also have to track and retain all relevant documents – fact finding needs analysis output, marketing materials, illustrations, projections, and the like—in a system of record. To provide context to the Financial Institution, the advisory firm will likely have to submit this content along with the opening of a new account or sale of an annuity. Alternately, the advisor firm may provide the Financial Institution access to this detail on the applications, retaining it in the field, although this has profound implications for both the security and independence of the advisory firm. This content will likely reside either on the CRM platform or on a compliant document management platform used by the advisor’s practice. The DOL Fiduciary Rule states that this content must be retained by the BIC office for six years to demonstrate the that conditions for the exemption have been met to support the exemption for the transaction. The Financial Institution will likely also create a requirement for advisory firms that it supports in the Best Interest Contract to retain all records and details on a system of record for this period of time as well.
Needs Analysis or Financial Planning
Under the DOL Rule, it will be necessary to defend the selection of an asset class, particularly if the asset selected is rolled over from one asset class to another and the commission and/or expenses of the new asset are higher than the previous one. With respect to current tools and technology, this means that the advisor will have to support a process with needs analysis, financial planning, or both.
Needs analysis platforms such as RightBridge or Impact Technology product wizards generally engage an approach for gathering information through a series of questions regarding client goals and current assets and delivering a series of recommendations for the appropriate product portfolio. Financial Planning tools like those of Advicent or eMoney Advisor are generally more comprehensive, taking into account current account balances, assets, cash flows, client goals, risk tolerance, and other details, and providing a specific plan for how much to save and how to reallocate the current portfolio.
The use of these platforms will almost certainly vary substantially among Financial Institutions. Some may deem it a necessity for the advisor to go through a standardized tool which they provide and which makes asset class and/or product recommendations which generally must be followed by the advisor. Others may allow the advisor to use one of many permissible financial planning tools to conduct a financial plan, which must then be delivered to the BIC Compliance officer for review upon product application or account opening. Regardless of the approach applied by the Financial Institution, advisory practices will almost certainly need to be prepared to support some form of these tools.
Product Analysis and Selection
Some needs analysis and financial planning platforms incorporate product details into the analysis platform, while others simply recommend an asset type with certain characteristics. In any event, if the advisor is an independent with contracts to sell funds and products with numerous carriers and fund providers, he or she will have to demonstrate why the particular product or fund was selected. For example, if an annuity product was recommended to align with goals of guaranteed income at a certain age couple with a surrender charge period less than a certain amount, the advisor should be able to show that the product selected for sale was selected for these characteristics.
Compensation Comparison or Evidence of “Reasonable Compensation”
The DOL Rule requires that any product sold to a client pay no more than “reasonable compensation.” In reality, it is very challenging to demonstrate that a product was not selected on the basis of superlative compensation. The Financial Institution providing the contracts and platform for the product may address this requirement by managing the product shelf and selecting only products deemed to be acceptable in terms of paying reasonable compensation. The Financial Institution may go further and levelize payouts among similar product types across carriers and providers to remove any incentive to choose one over the other.
In lieu of these options driven by the distributor, the advisor can use comparison tools associated with the product selection to pull compensation payout details for the products or funds short-listed by the advisor as possibilities for the client. For example, Ebix’s VitalAnnuity platform is being enhanced to pull carrier-provided GDC payouts for each product. These details will be provided in a side-by-side comparison report for the advisor. The advisor can save this detail and deliver it to the Financial Institution as evidence that the product sold was consistent with “reasonable compensation.” Alternately, if the product selected had the highest level of compensation, the Financial Institution would presumably require additional details regarding why this product was selected in terms of other product features.
A third option being pursued by the Insured Retirement Institute is to use a market study to demonstrate that the selected product payout is consistent with a large proxy of current market payout levels. IRI is working with Milliman, an actuarial consulting firm, to conduct a market compensation study of annuities and other investment products impacted by the DOL Fiduciary Rule.
Execution of the Best Interest Contract and Compensation Disclosures
The Best Interest Contract and compensation disclosures will be provided by the Financial Services firm and executed by the advisor. If the form is accessed and executed electronically, it will likely either be a document package supported by industry leaders like Laser App or Docupace, or it will be a distributor document associated with the eApplication process for annuities.
Negative Consent BIC Execution for Current Clients
Advisors who remain in the qualified fund business will have to execute the negative consent process. This will involve identifying all clients with qualified accounts. The Financial Institution will provide the BIC consistent with this process, and this must be sent to the clients in a verifiable way. The advisor should be prepared for questions from clients during this period.
It is noteworthy that, anecdotally, some advisors are using this process as an opportunity to do a more comprehensive review of the client’s portfolio and situation; they plan to use the negative consent process as a potentially valuable client account management and sales opportunity.
Coordination and Oversight with the Financial Institution Countersigning the BIC
The coordination and oversight with the Financial Institution executing the BIC with the client is likely to be one of the most significant new capabilities required under the DOL Fiduciary Rule. The Financial Institution is responsible for implementing tools, procedures, reports, and the like to manage the process, and it must demonstrate that this process causes advisors to act as fiduciaries. This will almost certainly impact the operations of most advisory practices in the areas noted above.
The specific requirements will depend, of course, on the Financial Institution selected as the distribution partner. There will be differences across distribution partners in both operational expectations and technology architectures used to support BIC Compliance. Therefore, the advisor should make sure that the partner selected has operations that can be supported by the practice.