The U.S. Department of Labor Fiduciary Rule, promulgated by the Obama Administration, is all but dead, thanks to Trump Administration efforts to blunt and delay its impact. A federal circuit court’s decision in March of 2018 to vacate the rule likely killed it for good.
However, just because regulators have abandoned the fiduciary rule for insurance agents and securities brokers who sell retirement products—and who now will continue to be regulated only from a suitability standpoint— doesn’t mean you shouldn’t become a fiduciary yourself. It just means you will do so within the framework of your professional ethics rather than of a legally prescribed standard of care.
Pope Francis, the leader of the Catholic Church, apparently agrees. He recently announced strong support of a universal fiduciary standard in a report entitled, “Consideration for Ethical Discernment Regarding Some Aspects of the Present Economic-Financial System.” The Pope also decried derivatives, improper management of client finances, and churning (the practice of making excessive trades in a client’s investment portfolio in order to increase broker income).
Now, if you’re not Catholic, perhaps you’ll ignore the Pope’s pronouncements. Even if you are, you might view them as being irrelevant. Still, his paper supports the notion that becoming a fiduciary today may, in fact, be more of a moral decision, than a legal one.
So the question is, should you start operating as a fiduciary even if you’re not required to legally? Maybe. But there are nuances, especially regarding compensation, to making such a transition. But insurance agents and securities brokers who want to align their interests with their clients, thereby minimizing conflicts of interest and client trust problems, may want to consider it.
Fortunately, The Institute for the Fiduciary Standard, a Virginia think tank devoted to promoting fiduciary status, has created a framework that financial professionals can easily adopt. It consists of six core fiduciary duties and 12 professional conduct standards. Although not all of these duties and standards will apply to all types of insurance agents and securities brokers—for example, some relate only to professionals who provide investments—the majority do. If you believe the benefits of becoming a fiduciary outweigh the negatives, you’ll want to look at The Institute’s guidance.
For example, its six fiduciary duties include:
- Serve the client’s best interest: This means you will always put your clients’ interests ahead of your own or those of your firm or of other parties. In short, you will live and die by the principle of undivided loyalty.
- Act in utmost good faith: To maintain that good faith, financial professionals must be truthful, honest, and accurate in all of their communications.
- Avoid conflicts of interest: The key is to provide advice that is independent, objective, and unbiased.
- Disclose all material facts and conflicts: This involves making clear, complete, and timely disclosures of all key data points.
- Act prudently at all times. Prudence demands that you act with skill and sound judgment in the context of your client’s situation.
- Control investment expenses: Implicit in the concept of loyalty, controlling investment expenses means that all fees, costs, and expenses should be fair and reasonable compared to the scope of services provided.
The Institute also produced 12 Professional Conduct Standards. Released on March 15, 2017, they expand on the six duties just listed. For a full discussion of each, read this. The following bullets detail what’s expected of a fiduciary professional:
- Affirm that the fiduciary standard under the Advisers Act of 1940 and common law principles govern the professional relationship at all times.
- Establish and document a “reasonable basis” for advice in the best interest of the client.
- Communicate clearly and truthfully, both orally and in writing. Make all disclosures and important agreements in writing.
- Provide or instruct clients how to obtain a written statement of total fees and underlying investment expenses to be paid by the client. This should include any payments to the advisor or the firm or related parties from any third party resulting from the advisor’s recommendations.
- Avoid conflicts and potential conflicts. This means disclosing all unavoidable potential and actual conflicts, managing or mitigating material conflicts, and acknowledging that material conflicts of interest are incompatible with objective advice.
- Abstain from principal trading unless a client initiates an order to purchase the security on an unsolicited basis.
- Avoid compensation in association with client transactions. If such compensation is unavoidable, demonstrating how the conflict is managed and overcome and that the product recommendation and compensation serve the client’s best interest.
- Avoid gifts or entertainment that are not minimal and not occasional. This includes third-party payments, “benefits,” and indirect payments that do not generally benefit the firm’s clients and may reasonably be perceived to impair objectivity.
- Ensure baseline knowledge, competence, and ongoing education appropriate for the engagement.
- Institute an investment policy statement (IPS) or an investment policy process (IPP) that is appropriate to the engagement and describes the investment strategy. Also important is having access to a representative universe of investment vehicles that provide ample options to meet the desired asset allocation and in consideration of generally accepted criteria.
- Consider peer group rankings to ensure underlying investment expenses are reasonable.
- Affirm in writing (one’s) adherence to Best Practices and attain written affirmation from the firm that these business practices have been reviewed.t
Bottom line on The Institute’s fiduciary approach? That just because industry regulators have backed off imposing a robust fiduciary rule doesn’t mean you can’t embrace fiduciary principles on your own. If you’re an investment advisor, you’re already required to do so. And if you sell insurance or investments, you can integrate many of The Institute’s duties and standards into your suitability-licensed practice.
At the end of the day, if you believe that putting your clients' best interests ahead of your own makes good business sense, then there’s no reason not to implement the best practices that will make that alignment a reality. It will likely become a true win/win. Good luck!
For information on affordable E&O insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.