While there has been a lot of talk recently about the
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 advisors, acting in a fiduciary capacity, provide advice in the best interest of their retirement investors. Acting in clients’ best interest will
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.
From recommending wrong share classes to cherry-picking allocations, these are the pitfalls advisers should avoid.
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 advisor
4. Consider all relevant client criteria, including cost, in making recommendations: Advisors 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 advisors 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 advisors comply with the best interest standard under the fiduciary rule, but may also build deeper and more meaningful relationships with clients.
