The People’s Tort: How Will Advisors Defend Their DOL-related Processes to Attorneys?

Sep 15, 2016


At the risk of sounding like a broken record (or an “all DOL Rule, all the time” radio station), we need to talk (again). I have a question for you, based on the ramifications of the rule:

How would you defend your process to tort attorneys?

In our webinar and whitepaper The DOL’s Game-changing Fiduciary Rule: What Should You Do?, co-author Raef Lee and I looked at a number of consequences (both intended and unintended) for the new rule. One consequence that many of our readers concentrated on was how the new rule invites tort attorneys into the mix.

As a refresher, here are the players and their roles (from our paper):

  • The DOL will police these rules for ERISA plans, including recommendations to roll over assets out of a plan. The DOL has an active and growing enforcement staff that in recent years, has given more attention to financial services companies. Given the priority the DOL has assigned to this initiative, it seems predictable that they will put audit resources into it (after some sort of ramp-up period).
  • The IRS will police these rules for IRAs. The IRS typically has not dedicated audit resources to these issues, relying instead on voluntary compliance and self-reporting. Given its budget constraints, it’s hard to see that changing anytime soon.
  • The SEC has an interagency agreement with the DOL, referring DOL matters that it identifies in its enforcement activities.
  • State securities regulators have expressed interest in being part of the enforcement effort for the new rules, although it remains to be seen whether that goes anywhere. If they are going to monitor this program, they will need to invest; they may be unwilling or unable to do so.
  • Tort attorneys are waiting for the opportunity to sue advisors and their firms on behalf of their clients who have been “injured” by advisors who are unable to justify their fiduciary role.

So how do you “defend” your process from those tort attorneys? (BTW, I think it makes sense to first have a process, if you don’t already.) For years, I have been writing about running an advisory business, instead of an advisory practice. A business has an owner who is thinking about long-term business goals and is focused on recurring revenue (instead of quick hit commissions) and building enterprise value. The business has processes and workflows in place and uses its CRM religiously to document everything that it does. Businesses have a defense against a claim; practices may not.

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Playing defense

Let’s look at a few things that may be able to help in your defense:

  • Your value proposition – Can you articulate why you are worth your fees or commissions? Do you know what it costs you to service a client and how they will benefit from your services? If you can’t articulate why a client should have hired you, how can you charge a premium over a robo or virtual advisor (i.e. around 25 bps)? Is your value proposition in writing somewhere and do your clients know it?
  • The decision to move, stay or orphan – Over the next 6 months or so, you need to decide how you will move forward with your business and those qualified assets on your books. Will you document that process and your rationale behind every account? Remember, it is not just the DOL on this; we have to be aware of the SEC and reverse churning, if we move accounts. How does your decision fit in the best interest of the client?
  • Your service process – Can you clearly articulate your service process? Is there a document that outlines how often you meet, what communications you send out and what the client can expect from you in your relationship? What are you doing behind the scenes for the client (and shouldn’t they know that, too)?
  • Your investment process – Is your investment process consistent across your book of clients (and if not, can you communicate the reasons)? If you are managing assets (rep as portfolio manager), are you using models for consistency, or placing trades one client at a time? Did you really do your due diligence, or are you really just basing your decision on past performance? Did you ask your platform provider if they recalculated returns on their managers to ensure the numbers are correct?

Filling the gaps

Often when I talk about succession planning, I ask if an advisor if he would buy his own business. The idea is for the advisor to think of the holes or what would cause a discount in the price. The advisor now has a view into what he needs to fix to make it more valuable to a buyer. In this case, I would ask, how would you sue yourself? What are the holes in your practice now that need to be fixed by April 10, 2017, when the DOL rule comes into effect? Sometimes putting yourself into someone else’s shoes (in this case, a tort attorney) can help you look at your business in a different way (one that maybe needs to be more compliant).

The type of documentation (service process, value propositions etc.) discussed here is not new, nor is it rocket science. I have written about it many times. What IS new is the sense of urgency that this new rule, and its enforcers, will bring to the table. As I count it, we have just over 6 months to get prepared. Plenty of time, if you have a business (and a plan).

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John Anderson

John Anderson

John Anderson is the creator and lead author of Practically Speaking blog and Managing Director of Practice Management Solutions for the SEI Advisor Network.

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