Going above and beyond for your clients and demonstrating your concern for their best interest is the newest way to “show your clients the money.” Of course, portfolio performance remains a top priority for every client. But, obtaining excellent returns will rarely make up for betraying your client’s trust or acting unethically in the process.
What is Your Fiduciary Responsibility?
Most advisors already think of themselves as fiduciaries, people entrusted with certain duties and obligations to act in the best interests of another person. Under the fiduciary rule, you are must act in the best interest of your retirement clients, even above your own interest. Among other things, you must disclose any potential conflict of interest and clearly disclose all fees and commissions to your clients.
A fiduciary standard is a higher level of accountability than the previous “suitability” standard. “Suitability” meant that if an investment recommendation met a client’s stated or defined needs and objectives, it was an appropriate recommendation. It was suitable for the client’s portfolio goals. The fiduciary standard requires advisors to put their client’s best interest first and to “prudently” manage the investment process.
The Fiduciary Rule is a new Department of Labor ruling that, after a delay by the Trump administration, is effective on June 9, 2017. The rule expands the definition of fiduciary under ERISA and applies to financial professionals working with retirement accounts. The Fiduciary Rule is just one rule that should be on your ethics radar. Consider the following as part of a bigger client-focused philosophy:
Commit the investment process to writing and set goals with your clients for both returns and risk. It is within this framework that you’ll be able to best evaluate options to recommend to your clients.
Select the appropriate asset types to create a diversified portfolio. Most fiduciaries look to modern portfolio theory (MPT), a generally-accepted method for choosing investments that meet the client’s risk and return goals.
Create an investment policy statement. This statement formalizes the process advisors can use to make specific recommendations to clients, keeping in line with each client’s stated risk and return levels.
Use the criteria you developed to evaluate the investment product and communicate your conclusions to your client.
Continually monitor the performance of the investments you recommended and the client’s portfolio and compare the results to an appropriate index. You must ask whether you are serving the client’s investment objectives.
The new Fiduciary Rule will affect commission-based structures in the financial industry the most. Advisors who continue to work on commission must provide clients with a new disclosure agreement, a Best Interest Contract (BIC).
But if you are charging a flat fee, those fees must still be fair and reasonable since they have a direct impact on the net investment return.
Investors rightfully expect honesty, integrity and accountability, regardless of whether the Fiduciary Rule directly applies to an investment or not. Most of the industry has embraced the new fiduciary order across the board anyway.
In fact, as the SEC seeks public comment on the Fiduciary Rule, SEC Chairman Jay Clayton recently announced his agency’s willingness to work with the Department of Labor on future rulemaking, which could signal a comprehensive (albeit muted) fiduciary standard for all advising activity in the future. (In this era of regulatory uncertainty, his comments could portend many other things.) Meanwhile, many states are considering imposing fiduciary standards on brokers after Nevada has done so in the retirement context. Don’t be surprised if in the near future, state or federal regulation will begin to govern how advisors and brokers treat clients in all dealings.
Advisors should welcome the opportunity to demonstrate to their clients that you care about more than just earning a fee. Demonstrate that you genuinely want to put your client’s best interest first and make investment decisions with the client’s best interest, not yours, in mind.
Surveys document that clients value honesty, integrity and thorough, well-researched and customized advice as much or more than the returns the investments generate. And that mindset will earn you more referrals than any other thing you do for your clients.