Advisers who can’t meet the standard might face legal jeopardy
Most of the discussion over the Labor Department’s fiduciary rule, which took effect in June, has centered around the “duty of loyalty,” which requires financial advisers to put their clients’ best interest ahead of their own compensation.
But that, according to Michael Kitces — a prominent expert on financial advice and publisher of the Nerd’s Eye View blog — has come at the expense of a focus on the fiduciary’s “duty of care,” an oversight that could expose financial services companies that don’t sufficiently train their people, or hire skilled practitioners, to legal jeopardy.
The duty of care, in short, is concerned with fiduciary advisers’ competence and commitment to thoughtful advice.
“What the duty of care essentially requires is that fiduciaries only give advice after conducting the appropriate due diligence, that they make sure they have a process to make decisions in a prudent manner,” Kitces said in a video played at the Retirement Income Industry Association conference at Salem State University. “This means you really have to have a clear process for conducting that due diligence and making the decisions — and, more important, that the advisers have the expertise to be able to arrive at a prudent decision after going through that process.”
That, Kitces said, is “a pretty big deal.”
Why? Because, he said, too many financial advisers can’t meet that standard. “The reality is still that financial advisers can hold (themselves) out as financial advisers or retirement experts to the public with really nothing more than a high school diploma and passing a two- to three-hour regulatory exam,” he said. “And the high school diploma is optional.”
That, according to Kitces, means that many so-called advisers may try to meet the duty of loyalty but have little to no chance of meeting the duty of care because they lack the training and expertise. And that could lead to big class-action lawsuits against major financial institutions, according to Kitces.
“Some attorney is going to come along and say, ‘So, explain to me how your thousands of retirement advisers would possibly know how to give ‘best interest advice’ to their retiree clients when only a fraction of them even have the training and education of a formal retirement designation program,’” he said. “It’s going to be a very awkward conversation for that company’s legal department.”
Republicans in Congress and the Trump administration’s Labor Department are fighting to relax the rule. “But at some point, the focus will shift from fighting about the rules to paying attention to how they are being enforced,” Kitces said. “And when it does, I think you are going to see a new wave of scrutiny on who says they give ‘best interest’ retirement advice and who is a retirement expert.”
Jeffrey Levine, the CEO and director of financial planning at BluePrint Wealth Alliance, agreed that advisers who deliver retirement advice under the Labor Department’s fiduciary rule will need advanced training.
“There has to be more than just passing the series 6 or 7 or 66,” he said, referring to the licenses for financial advisers. “It’s been an industry problem for a long time, but now it may catch up to advisers in a more powerful way. Passing those tests are a minimum, baseline requirement. But to really act in someone’s best interest, you need more.”
What sort of training might that be? Levine speculated that industry bodies, academic institutions, or financial services firms could offer advanced programs, rigorous self-study curricula or advanced degrees and designations, suggesting that they include a method for staying current as laws, strategies and products evolve. In the blog referenced above, Kitces noted at least two designations that meet the sort of training he thinks is required.