The good news is that broker-dealers (BDs) and registered investment advisors
(RIAs) will be able to leverage many of their existing business processes, tools and
technology as they adjust their business models to meet this higher standard of
care. As firms transform their businesses, the challenges are centered in the follow-
1. Formalize the investment advice process.
2. Analyze the product menu and ongoing product governance (e.g.,
3. Capture and maintain the appropriate information.
4. enhance supervisory processes to identify new risks.
Formalize the investment advice process
The heart of DoL rule compliance (and the advi-
sory process) is to act as a prudent person when
providing investment advice and transaction
recommendations. Some financial institutions
are establishing clearly defined and rigorously structured decision criteria regarding
matching products to client objectives, which advisors will be expected to follow
closely. other firms are opting for broad guidelines, and defer to their advisors’
experience and client knowledge when making recommendations.
Finding the right level of prescription is tricky, however, because of the variety
of distribution networks across the industry. Some distribution networks mandate
compliance with narrowly defined sales practices and the use of centrally managed
other distribution networks classify their advisors as independent contractors,
which creates a delicate organizational balancing act between allowing advisors free
will to design and implement solutions, along with effective supervision and man-
aging compliance risk. These firms are more likely to use a guideline approach.
Distributors are also using a guideline approach for higher-net-worth clients.
These clients tend to have more complex situations, which increases the need for
advisor flexibility in designing solutions tailored to their needs.
Further, the analytical framework to determine which products to recommend to
which customers will likely differ by firm. Some firms will rely heavily on quantitative approaches, while others will use a more qualitative approach based on
academic research to develop the necessary rule sets.
Regardless of approach, the following factors should be considered, plus others in
specific circumstances (e.g., the need for asset consolidation prior to retirement):
• Investment quality and performance
• Fees and expenses
• Fit with financial plan and investment goals
• Risk tolerance
• Time horizon
• Need for guaranteed income
• Client preference
expanded offerings in the industry, such as goals-based planning, are even more
relevant now with this new fiduciary standard.
Analyze the product menu
equally important is designing and
implementing a robust product gover-
nance process so that the product menu
contains sound building blocks to use
when designing customer portfolios. Key
product considerations include histori-
cal performance, features, benefits, goal
alignment, risk, cost, compensation and
financial strength of the counterparty.
Additional distributor considerations
include the skill and knowledge levels of
its advisor base, its compensation models,
its customer base and its client segmenta-
Firms need to remove any compensa-
tion conflicts that exist for their advisors
and justify any differential compensation
between product categories using neutral
factors. This exercise will lead to product
reduction, as many similar products avail-
able today exist primarily because they
have unique compensation arrangements.
As a result, many firms are actively
“narrowing their shelf” — reducing the
number of fund families and specific
products for various customer types. This
may be an effective strategy, and one that
parallels industry trends toward simpler
and more understandable products.
Firms are also carefully assessing proprietary products and attempting to evaluate
them against the objective criteria within
the governance process.
While changing product offerings may
be disruptive initially, advisors may find
themselves spending less time evaluating products and concentrating more on
understanding and solving client needs.