Analysis is KEY for Best Interest Compliance

This can’t be said enough: There is NO OFFICIAL DELAY of the Department of Labor’s Fiduciary Rule as of this writing.

Despite the fact that the Office of Management & Budget (OMB) has approved (in record time) the DOL’s request for delay of the more onerous parts of the Rule, the DOL itself has not publicly authorized the delay.

Americans for Annuity Protection strongly supports the proposed extension of the transition period and delay of applicability dates for the fiduciary rule prohibited transaction exemptions to July 2019. AAP believes that the extension must be adopted to avoid disruption and confusion for consumers in the months ahead.

Since the Rule is currently under review and changes are anticipated by all parties, the delay is even more necessary. In addition, AAP is committed to utilizing the extra time to forge a better alignment between the various regulatory agencies, including state insurance departments.

But regardless whether the delay is authorized or not, the WORLD HAS CHANGED! Advisors can no longer simply present a product to a client without the proper assessment of their financial goals and analysis of various products that would best address those goals.

There is a saying, “those who cannot remember the past are condemned to repeat it.” We must learn from our own past, as well as the past of the industry in which the DOL has forced us to participate: 401(k)s. Our past has been the constant and unrelenting assault on our products and those who sell them.

'War Rages On'

We fought battle after battle -- and often won – but the war rages on. AAP considers the standards of conduct of our independent channel - and the supervision of that conduct - an important tactic to ending the war. A product-and-channel armistice would recognize and promote competition and choice for consumers.

When this author built AssessBEST, a sales and compliance system for annuity and life insurance advisors, our in-depth and exhaustive research included massive reading of case studies on ERISA lawsuits. We did this because the plaintiff’s bar is nothing if not predictable and (idiom alert) history does repeat itself.

Therefore, claims made against plan fiduciaries is the bulwark of our system design. Why wouldn’t the claims made against plan fiduciaries be resurrected and turned on IRA fiduciaries? As the kids say, DUH!

The claim that may be the most obvious to trolling lawyers is “self-dealing.” It may also be the easiest to establish in our independent, commission-based, distribution model. Self-dealing is when a fiduciary takes advantage of his or her position in a transaction and acts for their own interest rather than the clients. Self-dealing is a wrongful act by a fiduciary and would deem a transaction prohibited.

Because fiduciaries have expert knowledge and skill, and they are paid because of that knowledge and skill, they are deemed to be in a special position of control over an important financial decision. When a fiduciary engages in self-dealing, they breach their duty by acting in their own interests rather than the interests of their client.

A major law firm specializing in the interpretation and application of the DOL Rule says that experts expect firms to shift their focus to “buttoning up documentation” because “firms must be able to prove adherence to the impartial conduct standards by documenting the logic behind recommendations.”

While the new DOL rules are principles based and do not provide discreet instructions as to what advisors should do to fulfill fiduciary duties, industry executive David Trainer said advisors cannot lose with clients or regulators by incorporating research into their practice that is “inarguably in the best interest of clients.” Trainer is CEO of New Constructs, an investment research firm.

Do Proper Analysis

AAP recommends that to provide advice that is “inarguably in the best interest of clients” means your analysis of product solutions must be:

1. Complete – all relevant information and product solutions has been diligently reviewed.
2. Objective – there must be quantifiable analysis that supports the recommendation.
3. Transparent – advisors need to be able to show how the analysis was performed and the data behind it.
4. Relevant -- there must be a demonstrated and quantified solution to the client’s financial needs.

Many advisors are practicing this today. But are they documenting their analysis process and their determination decision criteria? The Impartial Conduct duties of prudence and care focus on the process for making fiduciary decisions. The protection from claims of breach of impartial conduct is DOCUMENTATION and RECORDS.

AAP recommends that every advisor, regardless of your license, use a software platform to systemize your assessment process, document your analysis and disclose all relevant information transparently to your client.

A robust software system should:

1. Record client’s interests, goals, time horizon and risk tolerance.
2. Document analysis and key factors used to make the recommendation.
3. Promote Diversification – another key fiduciary duty – to help minimize the risk of investment losses.
4. Retain Client’s Acknowledgement of, and agreement with, the information gathered.

There are many systems out there today to help you and you can easily find one that integrates seamlessly with your business model. In fact, this article is a good start. And, check out www.assessbest.com, too, for consideration. More information here.

Not only will it help you serve your clients and show your professionalism; it may be your best defense against fallacious legal claims.

Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO of Americans for Annuity Protection and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.

This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question. Contact Kim at [email protected].

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