Group: Define ‘Best Interest’ Before A Judge Does

The financial services industry is best served defining the Department of Labor’s “best interest” standard for advisors before the courts do it, according to a financial planning expert.

“No one has defined ‘best interest,’” said John Gilliam, a former life insurance agent and current professor at Texas Tech University. “The Department of Labor rule uses the term but doesn’t specify what the terms mean.”

The Center for Financial Responsibility at Texas Tech has formed the Best Interest Initiative to define what the term really means. The DOL fiduciary rule issued last week requires financial advisers to act in the best interest of their clients.

Early readings of the rule are in agreement that the best interest proviso does not mean always steering clients to the lowest-cost option. Beyond that, advisors and industry analysts are unclear on what exactly it does mean.

Risk tolerance is one area, for example, that can be part of the equation, analysts say. But how would it be weighted? Is there a formula to be developed? Texas Tech hopes to answer these questions, Gilliam said.

The Texas Tech initiative encourages researchers in the Department of Personal Financial Planning to study what best interest means and how advisers can practice under these rules. The goal is to help the industry formulate and define “best practices” under the new parameters on financial advisors, Gilliam said.

“My only concern with (the fiduciary rule) is it will be determined what is and what isn’t in the best interest by the courts,” Gilliam said. “I believe we should be part of the solution and determining what are best interest practices ... rather than letting other people tell us what it is.”

The National Association of Insurance and Financial Advisors (NAIFA) supports the industry being proactive, said Paul Dougherty, president-elect of the organization. NAIFA had similar discussions with DOL and trying to figure out where regulators expect the “best interest” standard to land has been a guessing game, he added.

“It’s always difficult to try to practice our relationships with our clients when we’re being held to a standard that’s not clearly defined,” Dougherty said.

Research will start with a survey of selected “experts” in financial services, Gilliam said, followed by a general survey of advisors and other key personnel.

“I want it to be very inclusive,” he explained. “My pursuit is, as a social scientist, to look at what people believe and think and survey professionals and consumers to come to a consensus on what best interest means and how it’s incorporated in the practice of financial advising.”

Regarded as one of the key academic leaders in the industry, Texas Tech’s Personal Financial Planning program is a natural fit to undertake the research, Gilliam said. Staff is busy compiling a budget for the initiative, but hopes to have the study completed “in as timely a manner as possible,” he said.

The university seeks “strategic partners” to join their research team, according to a news release from Texas Tech.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.