Last week, we discussed the requirements of the DOL Transitional Fiduciary Rule. We reminded our readers that as of June 9, 2017, the DOL requires agents and advisors to give advice that is in the “best interest” of the retirement saver.
Our focus was on the question: What does BEST in best interest really mean? And we explored some of the questions we hear most frequently from advisors.
Recall that the best interest standard has two chief components: PRUDENCE and LOYALTY. Under the prudence standard, the advice must meet a professional standard of care using skill and diligence. Under the loyalty standard the professional must avoid conflicts of interest and pay only reasonable compensation.
Americans for Asset Protection emphasizes that the prudent and loyal process is the imperative element in all insurance professional’s business models that provide advice and recommendations to protect assets and create financial independence. But the client must be equally involved in the process and their expectations are the foundation of a best interest determination.
So, let’s explore what a prudent and loyal process should look like from the consumer’s point of view.
ONE - Getting to Know You
Like Rogers & Hammerstein’s marvelous song from the "King and I," the very first step is “Getting to Know You” and, as the lyrics fine tune, “getting to know all about you.” Clients and prospects all expect that before you even think about how to help them, you need to really GET TO KNOW all about them.
Understanding all about them means understanding their needs – including their goals, concerns, planning horizon, current financial situation and future expectations and last, but not at all least, their risk tolerance.
A relative recently asked us to help her understand her annual financial report. She had moved 2,000 miles since starting her financial planning and she had many questions and concerns. She is a face-to-face person and is most comfortable talking in person, so we offered to put her in touch with a financial planner we knew with an office just a few blocks from her work.
As part of her pre-meeting prep she received three pages of documents. The first two asked for her personal and financial information, planning goals and her retirement horizon – we’ll get to the third page in a minute.
The fact finder was a good start and the meeting will be more productive with this information. I was concerned that the paperwork didn’t include a risk tolerance assessment or even a question about her risk tolerance.
AAP believes that assessing risk tolerance is one of the most fundamental aspects of getting to know your client and the assessment process. Recommending products or strategies without determining risk tolerance/diversification need will not meet the prudence test.
Perhaps, the intent is to do it at the first meeting. Nonetheless, we also suggested that she ask her new advisor to assess her risk tolerance and diversification needs.
TWO - Getting to Know What to Say
Second, as our song’s lyrics state, customers expect their advisor to fully understand their needs and use their expertise and knowledge to evaluate products and/or strategies that will help them meet those needs.
A prudent and loyal analysis process must include a method of prioritizing the goals and objectives and the prioritization must involve the client.
Also, the analysis process must include a method for determining product solution(s) and/or strategy that will deliver the goal/objective(s) within the planning horizon.
Finally, the process must include checkpoints that show how the recommendation(s) matches against the goals, risk tolerance/diversification needs, and the planning horizon.
Don’t forget: It is very important to have documentation of the analysis process and conclusions.
THREE – Getting to Like You, Getting to Hope You Like Me
The LOYALTY component of impartial conduct prevails in the third step and when accomplished our song is complete. Your client will “like” you if armed with all of the information needed so they can conclude for themselves your recommendation is in their best interest.
Back to page three of the pre-meeting prep for that relative. It was titled: Fiduciary vs. Suitability Investment Advisors and offered the following:
The difference between a suitability and fiduciary advisor is extremely important. Under suitability guidelines, an advisor is required to make recommendations based on what is suitable for the client, but it does not require them to do what is absolutely best. A fiduciary investment advisor is legally obligated to work in the client's best interests. This can be explained with a very simple analogy: You walk into a meat shop, and want to know which meats are the best to buy. You can do this two ways. One, you can ask the butcher, who might point you to the meats with the highest profit margins or the soonest expiration dates. Two, you could bring a dietician who will tell you which choice of meats are the healthiest and truly the best. If you couldn't tell already, a fiduciary is your dietician, while the suitability advisor is like a butcher. It might be suitable for you - it meets the food regulations for safety - but does that mean it's truly the best?
What this analogy is missing is the YOU component. While good, it is not just about the dietician “telling” you which choice of meats is best, it is about you understanding the information and reasoning so that you can choose the meats yourself – and not just once but ongoing.
Acting with prudence and loyalty is just good business and it’s your obligation to your client under an impartial conduct standard. The standards listed above are important, but to get to the YOU component. AAP Board member Dick Weber adds a few more. Weber is a fee-only insurance planner and defines meeting his clients’ best interest by also:
• Acting with the good judgment of a skilled professional – not just prudence and loyalty;
• Providing conspicuous and full disclosure of all important facts – not just conflicts; and,
• Fairly managing, in the client’s favor, any unavoidable conflicts – not just disclosing them.
Weber follows this process so “when the client chooses a particular action plan, product, path, etc., she/he is informed and advised - and is the one in the position to declare that the result is in their best interest.”
Weber recalls a former professor and colleague’s advice that it is "presumptuous for the advisor to declare that his or her advice is in the client’s best interest! Only the client can (ultimately) make that determination!” And, if you follow a prudent and loyal process you’ll feel:
Suddenly bright and breezy
Because of all the beautiful and new
Things I'm learning about you
Day by day
Register today for our FREE Suitability & Fiduciary Training Course and we’ll send you a Certificate of Completion and CE Credit Voucher when completed. Register here.
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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