Willing Fiduciary

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Category: Department of Labor (Page 2 of 2)

Why The DOL Fiduciary Regulation Was Revised

The Employee Retirement Income Security Act of 1974 (ERISA) was established as a federal law. One of its intents was to provide a sense of Fiduciary Responsibility for those designated as Fiduciaries defined, in action, as those who have a role in managing and controlling Retirement/Pension Plan assets. It also defined a plan Fiduciary to include anyone who gives investment advice for a fee.

In 1975, the Department of Labor (DOL) looked to elaborate on “investment advice” and issued a 5-part regulatory test that provided some structure to the meaning. About 40 years later, the DOL started to recognize that it actually enabled Financial Advisors, Brokers, Consultants, and Valuation Firms to:

. Avoid Fiduciary Status
. Disregard Fiduciary Obligations
. Disregard prohibitions on “disloyal and conflicted transactions”.

In effect, Employer Sponsored Retirement Plans became a platform for Financial Advisors, Brokers, Consultants, and Valuation Firms, to steer Retirement Plan Participants to investments based on their own self-interest. This type of intent is prohibited by ERISA.

These advisors represent a whole generation of people who have no idea as to what the spirit of these laws are, no Fiduciary awareness, and no fear of accountability under ERISA. This is what the Department of Labor is trying to remedy.

The FinTech Fiduciary

Many participants in the financial services industry utilize FinTech for financial planning, analytics, client reporting, portfolio management, etc. All technology, however, leaves a footprint of evidence as to how it’s being applied. If one is in the business of giving impartial and transparent advice, then there is no better median of making the evidence visible than FinTech.

Being committed to providing advice in a client’s best interest is one facet of having the legal responsibility of a Fiduciary. Often overlooked is the matter of oversight of service providers. The supervision of partners in the Fiduciary process can be evident if financial technology is properly applied to the process. Insofar as applying technology to satisfy the DOL’s Fiduciary Duty Rule, that may mean identifying the roles, actions, and strategies of Record-keepers, Administrators, Auditors, Investment Advisors, and Attorneys by ledgering all interactions.

A FinTech Fiduciary with optimized FinTech has an elevated cognizance of oversight.

An Introduction – Understanding Fiduciary Obligations

Although there should be no confusion about it, the role and accountability of a Financial Advisor/Consultant has always been rather fuzzy. This lack of clarity is especially purposeful to Independent Broker Dealers, Wire-houses, and Insurance Companies because it allows them to limit their potential legal liabilities behind the interpretation and accountability of “suitability”.  The regulatory interests that define and monitor this are FINRA and ERISA.  The relationship between the firms that benefit from presenting products via suitability and the regulatory interests can become quite strained and adversarial at times and that has materialized recently in the Department of Labor’s recent Fiduciary Duty ruling.

Acting in the best interest of the client, proper security selection and portfolio construction supported by meaningful insights and analytics to make the best solutions visible to a client, has always been a fundamental obligation. In fact, I’m not really clear as to how anyone can provide investment advice in the client’s best interest any other way.  It does require, however, a unique set of skillsets that must be learned in theory and honed through experience.  Clients should expect you to act in their best interest and fiduciaries need to honor this expectation.  This obligation, which should be rather intuitive, is no different for the legal Employer Plan Sponsor of a Retirement Plan and those designated with discretion in administering and managing it.  Both FINRA and the DOL make it very clear that it is in one’s actions and responsibilities that manifests the role as a Fiduciary.

After reviewing and reverse engineering the 5500 tax filings of many large sponsors (and having many conversations with HR benefit representatives, some on the sponsor’s administrative committee) it is clear to me that they do not understand their fiduciary responsibilities. It also seems as if many Plan Sponsors justify their actions via ERISA’s definitions and not the DOL’s.  In fact, I don’t believe that most are even capable of acting in the participant’s best interest because they are not trained money managers, product specialists, and cannot apply the proper techniques and analytics to do so.  This, in itself, is a breach of fiduciary responsibility because there is no way to supervise the Administrator, Record-keeper, Investment Advisor, Auditor, and all other partners being compensated to implement and execute the Retirement Plan. This, to me, inhibits oversight which is the primary causation of  fiduciary breeches.

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