Four-Part DOL Rule Series: Part III, Duty of Diligence

Commentary

Welcome back! For those of you who are just starting on the Series, please catch up on Part I: Permitted Activities for Life-Only Licensees and Part II: the Duty of Care.

We continue to get numerous calls from agents and advisors who believe that they can simply toss in a disclosure document provided by a carrier and comply with the DOL Fiduciary Rule.

We have a sad reality check for you. Ask yourself this: whom does this form protect?
Unlike using a carrier’s suitability form -- where the law is clear that the carrier is the liable party for unsuitable sales -- the DOL Rule makes it equally clear that using the 84-24 Exemption places the liability for compliance with ALL parts of the exemption squarely and solely on the Advisor’s shoulders.

And make no mistake: DISCLOSURE is only ONE PIECE of the full compliance puzzle -- disclosure compliance. While that isn’t insignificant, it isn’t complete either. YOU are liable for adhering to all of the exemption requirements – not just disclosure. This series is intended to help you understand exactly what that means to you and your practice.

Acting in your client’s best interest, otherwise known as the Impartial Conduct Standards, requires that you discharge your duties in the client’s best interest with care, diligence and loyalty. The duties of care and diligence are often referred to by the somewhat old-fashioned term - prudence. To act prudently is one of a fiduciary’s central responsibilities under the Impartial Conduct Standards.

Do Your Diligence

Prudence focuses on the duties of care and diligence when making fiduciary recommendations. Last week we focused on the duty of care. Fully understanding your client’s financial needs, goals, time horizon and risk tolerance.

While these two duties are inextricably linked we look at them separately to better understand their role in adherence to the Best Interest Standard. The Duty of Care is a practice and the Duty of Diligence is a PROCESS.

Consider this analysis from RetirementTownHall.com:

In each of the ERISA fiduciary cases, courts focused on “how” a decision was made. Did the fiduciaries document their decision and how they arrived at it? Deciding not to act is a decision. Document both decisions and the progression to an eventual decision. Did the fiduciaries seek expert advice when warranted? The courts are not looking for the right answer using the benefit of hindsight. They are looking for an answer that a prudent person familiar with the situation could have arrived at. When fiduciaries document a prudent decision-making process, unfavorable legal decisions should not become an issue.

While this excerpt is referencing ERISA cases, they are still good lessons providing us with insight on what the IRA advisor must do to avoid problems with regulators, lawyers and carriers. In our world of funding annuities - and sometimes life insurance or LTC - with qualified funds, IRA advisors must complete TWO steps:

STEP 1 – Duty of Care: The Practice

1. Understand the client’s financial goals, needs, concerns and time horizon;
2. Evaluate the client’s risk tolerance justifying diversification need for an insurance solutions, and;
3. Validate the final recommendation to purchase an annuity, life or LTC product.

STEP 2 – Duty of Diligence: The Process

1. Demonstrate the process of client assessment and product solution analysis;
2. Document the client’s agreement with assessment and the recommendation;
3. Disclose compliance with Impartial Conduct Standards.

It is clear, that “business as usual” with only an additional disclosure will not hold up. Advisors are risking their business and livelihood by ignoring the Rule’s serious impact. A transaction that is found to be “prohibited,” because the impartial conduct could not be demonstrated, at best will result in return of premium and commission payback and, at worse, could cause the IRS to require an excise tax on the amount of the transaction up to 100 percent of the premium. Not to mention, potential legal bills.

Advisors in the business of PROTECTING RETIREMENT SAVINGS must seek their very own protection by using a system of compliance that documents their adherence to Impartial Conduct Standards and retains all records so they can demonstrate compliance with those standards.

Consider this advice from the insightful and knowledgeable Fred Reish, partner at Drinker Biddle & Reath:

“The best interest fiduciary process is a new way of looking at everyday transactions and making recommendations about those transactions. It’s important for advisers to realize that it’s not just a compliance issue; instead, it’s a process . . . a thoughtful, documented, best interest process.”

Americans for Annuity Protection wants to help you protect yourself and your business so that CONSUMERS may enjoy access to your knowledge, skill and product choice for decades to come.

Be careful and diligent. Follow a standardized, systematic and repeatable process to determine what information is necessary to make an informed decision with proper rationale and analytical checkpoints that confirm the recommendation.

Looking for a simplified process and system of documentation and retention? Look no more! Visit Assessbest or contact a Charter Marketing Organization!

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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