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We recently held a “Lunch & Learn” event here at our SEED Offices where we discussed the Department of Labor Fiduciary Rule in depth. This post contains some questions asked by the attendees.

Q: How will this affect the insurance “Financial Advisors?” Will they just sell whole-term life as an investment?
A: Life insurance would only be covered by this rule if it is sold inside of a qualified (retirement plan) account, which is not very common. Although life insurance is a risk mitigation tool, insurance salesmen masquerading as “Financial Advisors” are still likely to promote insurance as an investment. 

Q: Will there be more robo-advisors for small businesses?
A: Yes and no. Small businesses are usually complicated (think tax codes, HR, and cash flow) and need a higher degree of hands-on attention and service. In the (not so distant) future, investing programs for small businesses may be streamlined with significant cost compression, while services like customized plan design and fiduciary education and risk management programs will gain in popularity and demand.  

Q: What are some good action steps for Financial Advisors under independent firms?
A:
1)    Read and understand the Rule at a very high level.
2)    If the independent firm does not provide full-service compliance, contract a compliance specialist.
3)    Ensure the independent firm’s compliance knows and understands what changes will be coming              regarding products, services, and compensation.
4)    Decide if a BIC (BICE) or Level-Fee business model is right for your clients.
5)    Compare your business model to that of the independent firms (taking into account changes                     dictated by the Rule).
6)    Assess whether the independent firm is handling or can properly handle the Rule. (Realize that an            independent firm must create policies and procedures to manage all of their advisors and if they do        not do so properly, there is significant headline risk).
7)    Decide what (if anything) you may need to change about the way you do business.

Q: What are some action steps for clients and business owners to address this with their Financial Advisors?
A:
1)    Realize that this isn’t a government intervention without merit, and take this issue seriously.
2)    Realize that most financial advisors represent their employing firm – not the client.
3)    Realize that your relationship with your advisor is “business first.”
4)    Do some research to make sure you understand the Rule. The Rule is all about prudent processes            and avoiding (or mitigating) conflicts of interest. 
5)    Ask the hard questions.
     a.    What are the total fees that I am being charged?
     b.    How much of that do you make?
     c.    Do I pay you commissions or fees?
     d.    What services do you provide me for those charges?
     e.    Can you provide me a written document regarding your investment selection and monitoring                      procedures?
     f.    How do you and your firm plan to address this Rule?
     g.    What impact will the Rule have on the business that we do together?
     h.    Should I be making any changes to my investment products? (Put it in writing).

Q: Is there any action that I can take regarding the actions of a prior Financial Advisor that didn’t provide proper guidance and advice?
A: It depends on the situation. We always see the past 20/20. Did you receive good advice at the time that has since been tainted by a changing economic environment? Was the professional a fiduciary or operating under the suitability standard at the time? How long ago was it, and do you have any supporting documentation that they acted inappropriately? 

The very difficult proposition of holding a Financial Advisor liable for damages caused by misleading or bad advice was a contributing cause for the Rule.

Q: Is this only going to benefit lawyers and create more “It’s your fault I didn’t make more money” finger pointing?
A: One of the biggest issues that the financial industry has with the Rule is that it grants clients the right to sue via class action lawsuits. If you currently have an issue with your Financial Advisor, the case goes to arbitration. This is an industry standard that is forced upon clients.

Lawyers will certainly benefit from the Rule, but not because people do or don’t make more money. They will benefit when firms or advisors put their own needs ahead of those of their clients.