Stewardship Standards

Vincent explores the debate of Industry Standards, Duties, Best Practices and Regulatory Trends

The views and opinions expressed in this blog are those of Vincent Micciche and do not necessarily reflect those of LifeMark Securities

Analysis of Latest FAQ’s Regarding DOL Fiduciary Rule

As the effective date of the Department of Labor (DOL) Fiduciary Rule approaches, the agency has issued further guidance in the form of a 16-page document containing 30 questions and answers together with an appendix. This analysis distills the guidance significantly while building on previous analysis I have provided.


The following is my analysis and interpretation of certain aspects of the rule. Although I am recognized as a subject area expert on Fiduciary Standards, the DOL Rule is breaking new ground and is virtually untested. In addition, I am the Chief Compliance Officer (CCO) of LifeMark Securities Corp. and am charged with the responsibility of providing training to our adviser’s and developing policy and procedural changes that address new requirements of the rule. Doubtless, you will read opinions and guidance that may disagree with my analysis. If you are a financial adviser, you should confer with your firm’s CCO and understand that their guidance and policies prevail.


Since publication of the rule last April, the hard requirements of the rule have not substantially changed. However, the guidance supplied by the agency to date has provided helpful interpretation and answered some the important questions from the industry regarding available relief. To quickly recap, the following remain hard requirements of meeting the professional standard of care required by the rule.

Duty of Loyalty – An adviser must make recommendations that are in a customer’s best interest and avoid self-dealing.

Duty of Prudence and Competence – An adviser must be diligent, prudent and have a high level of knowledge and understanding of anything they recommend to a customer.

Disclosure of Conflicts of Interest – An adviser must provide the customer with comprehensive disclosure of conflicts of interest that exist and explain how they are being managed. This requirement will fall squarely on the institution with which adviser is affiliated.

Disclosure of Fees – An adviser must provide the customer with comprehensive disclosure of the fees, charges and expenses associated with the solution they are recommending. Again, this requirement will fall on the institution with which the adviser is affiliated.

Reasonable Fees and Compensation – An adviser may only charge fees and receive compensation that are deemed reasonable for the services being provided when compared to professional standards and norms.

Policies and Procedures – The institution with which the adviser is affiliated with must develop policies and procedures designed to ensure adherence with the “best interest standard” and prohibit financial incentives for advice that is not in the customer’s best interest.

Acknowledge Fiduciary Status - Without exception, an adviser and the institution he or she is affiliated with must acknowledge their status as a fiduciary and be bound personally by applicable law.

Analysis of the Latest Guidance and Impact

The good news is that institutions have considerable latitude in determining how they deploy and demonstrate compliance with the aforementioned requirements. Advisers also have latitude in meeting the requirements however, they must adhere to their firm’s policies and procedures.

The following are questions I excerpted from the latest guidance that I found particularly interesting and what I found to be significant in the answer. You may want to refer to the entire text of the FAQ’s published by the DOL while reading this .

Q2. Will the Rule cause change in the financial services industry?
In addition to the aforementioned duties, the agency’s answer specifically prohibits firms from using bonuses, contests or quotas.

Q8. How much does a typical worker lose due to conflicted investment advice?
Interestingly, the agency uses an example of overcharging a customer 1% to illustrate the effect of excessive fees over time. In their example using an investment of $100,000, they calculate a loss of $16,000 in 10 years and $55,000 in 20 years!

Q9. Will financial advisers still get paid for providing retirement investment advice? I’ve heard that some advisers will get “exemptions.” What does that mean?”
The agency acknowledges that advisers deserve to be paid fair and reasonable compensation for their advice. They restate that in most cases a “Best Interest Exemption” (BIC) will be required and they summarize the essential content of the BIC. The good news is that the voluminous disclosures required can be met by directing the customer to a website. This is a true victory for tree lovers!

Q13. What counts as a fiduciary “recommendation” as opposed to general investment education?
The agency defers to FINRA’s definition which is very clear and well established .

Q15. What does it mean to me to have investment advice provided in my best interest?
This is very clear “… they must investigate and evaluate investments, make recommendations, and exercise sound judgment as a knowledgeable and impartial professional”.

Q17. Does the best interest standard mean that my financial adviser must search for and identify the absolute best product for me?
Great answer here! No. They agency affirms that acting in a customer’s best interest does not require choosing the absolute best product. In other words, the adviser’s obligation is not perfection but rather to act prudently.

Q18. Can I continue to work with my financial adviser after April 10, 2017?
The answer here strongly clarifies that the adviser has many choices regarding choice of business model. Notably it confirms that commission based sales are acceptable as are specialized or limited product offerings provided the adviser is acting in the customer’s best interest.

Q22. My financial adviser says he must switch my IRA from a “non-advisory” account where I currently pay commissions for each transaction to an “advisory” account for which I will pay an annual fee based on the assets in my IRA. Do the Rule and exemptions require this change?
The agency’s answer to this question is no and should be read completely. Notably, they specifically acknowledge that a commission sale may be more favorable than moving customers to fee based accounts. They go on to confirm that it’s okay to charge hourly fees, asset based fees or commissions!


My greatest takeaway from the latest guidance is the explicit underlying message that compliance with the rule is achieved by adopting a prudent process and applying it uniformly while providing retirement advice. This should be seen as great news for retirement investors and the industry.

Compliance = Demonstrating Procedural Prudence

Advisers and firms can easily meet the professional standard of care required by making procedural changes as opposed to drastically changing their business model’s revenue sources. Let me take this opportunity to predict that Merrill Lynch will soon reverse its recently announced solution of abandoning commission product sales to retirement plans. The agency’s answers to questions 18 and 22 explicitly confirm that a fee based model may not be the best solution for all customers. In fact, they strongly suggest that the availability of a broad array of solutions, including commission products, may better serve retirement investors.

While the DOL still considers fees to be their paramount concern, as emphasized in their answer to question 8, they have demonstrated increased flexibility in viewing a broad variety of product solutions as appropriate. I think this marks a dramatic shift in their thinking and provides considerable relief to firms and advisers that choose to utilize the available exemptions – especially a BIC.

An important question for firms and advisers is how they are able to demonstrate procedural prudence and fiduciary behavior as opposed to good rhetoric – “I always act in my customer’s best interest”.

Here are a few things we have done at LifeMark Securities:

  • Created a culture that is centered on stewardship and recognition of a fiduciary relationship with our customers
  • Provide continuous Firm Element training in the application of fiduciary principles (GFS program) and ongoing certification of adviser’s seeking the GFS designation
  • Public statements that articulate the firm’s ethos and value proposition to customers
  • Adopted and applied a procedural template that demonstrates prudence that is the core of our business model and corporate governance

Analyze – Strategize – Formalize – Implement – Monitor

While pundits debate the implications of cabinet appointments in the new Trump administration and whether or not the DOL Fiduciary Rule will survive, the clock is ticking! My personal belief is that the fiduciary movement is afoot and will not be reversed. Whether the Rule survives is moot as a uniform fiduciary standard for the financial services industry is imminent.

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