While there has been a lot of talk recently about the fiduciary rule’s fate, it’s important to note that the DoL rule is accelerating — not causing — a fundamental shift that was already taking hold in how advisers manage their relationships with clients: the move toward greater transparency. This evolution, rooted in changes in consumer preferences and the advent of new technologies, will remain with or without the rule.
So, let’s consider four ways that complying with the rule – and embracing the best interest standard — could help strengthen your client relationships.
1. Use the best interest standard to help you get to know your clients better: The DoL requires that advisers,, acting in a fiduciary capacity, provide advice in the best interest of their retirement investors. Acting in clients’ best interest will not only help with compliance —it can also go a long way toward establishing a deeper, more personal connection. It gives you further incentive to document and formalize discussions about goals, risk tolerance, investment time frame, return objectives, tax restrictions and other life circumstances. These discussions may give you a much more intimate and personal view of the client, and may provide them peace of mind that you are indeed acting in their best interest. Documenting these discussions may also allow you to demonstrate that you are following a prudent investment process.
2. Documenting how you evaluate investment options may increase client confidence in your recommendations: You may need to implement a process to ensure that investment recommendations are made prudently. For example, recommending low-cost investment options may not necessarily be in a client’s best interest; evaluating these options should involve confirming that costs are reasonable relative to similar offerings, and that they provide overall benefits and value.
You should also consider documenting the criteria you took into consideration. Sharing your decision criteria with clients is another way to demonstrate that your recommendations are based on helping them meet their financial goals.
3. Be transparent about fees, expenses and material conflicts, which may win loyalty: An adviser acting as a fiduciary should clearly and accurately disclose all pertinent information about investment decisions and recommendations. All fees, expenses and material conflicts should be disclosed, which may help to build client trust.
4. Consider all relevant client criteria, including cost, in making recommendations: Advisers operating under a fiduciary standard must ensure their fees and compensation are reasonable when making investment recommendations to retirement customers. A common initial reaction to the rule from many advisers is a fear that the new best interest standard would prohibit them charging a fair price for their services, or from recommending certain investment products and services due to their cost.
This may be a misreading of the rule’s intent. The DoL has clarified that the best interest standard does not require that a financial institution or professional offer their services at the lowest cost, or for the least compensation. In fact, the DoL has recognized that one must weigh costs against the potential benefits and value an investment alternative may bring to the investor's portfolio. Discussing these trade-offs is yet another way for you to demonstrate your value to clients.
Ultimately, a fiduciary should consider potential investments based on the full range of relevant criteria, including risk tolerance, cost compared to value, and expected time horizon, that apply given a particular retirement investor’s investment goals and objectives.
Putting the client’s interests first, and documenting the steps in the investment recommendation process will not only help advisers comply with the best interest standard under the fiduciary rule, but may also build deeper and more meaningful relationships with clients.