Trust: Why Financial Services Should Embrace DoL’s Fiduciary Rule

When the U.S. Department of Labor issued its fiduciary rule last year, it set financial advisers, insurers and agents into a mad scramble to meet an April 10, 2017, implementation deadline. The rule elevates all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary, or someone bound legally and ethically to meet the standards of that status.

What does “fiduciary” mean? The definition is “a person who holds a legal or ethical relationship of trust with one or more people.” The ruling was intended to change the emphasis in financial services from profit for the seller — derived from sales of financial products with the best payoff for the adviser — to service for the customer. Implementing it required a new level of compliance, disclosure and honesty. It demanded that advisers proactively explain conflicts of interest and explain all fees and commissions to customers.

Financial service companies were working hard to have these systems and safeguards in place when the Trump administration last month issued a memorandum that encouraged the Department of Labor to conduct a new “economic and legal analysis” to determine whether the rule was likely to harm investors, disrupt the financial services industry, or cause increases in litigation or financial consulting prices.

If the DoL should find the ruling would hurt investors or firms, it could recommend that it be rescinded, according to the memorandum. How this memorandum affects the April 10 deadline remains unclear, but the Trump administration’s intentions seem very clear.

Ditch Compliance Work?

“The rule is a solution in search of a problem,” White House Press Secretary Sean Spicer said in a briefing the day the memorandum was signed. “There are better ways to protect investors, and the Trump administration is taking action to do so.”

However, the regulation-phobic Trump administration may be fuzzy about the meaning of “problem,” in this context. Investors simply do not trust financial advisers, studies have shown.

Sixty-five percent of 1,904 respondents said they mistrusted the financial services industry to do what was in the best interests of its clients — either a lot or a little — in a poll the American Association of Individual Investors released in 2015.

That mistrust may not be misplaced, suggests a working paper by business school professors at the University of Chicago and University of Minnesota.

Seven percent of the 2,000-plus advisers counted in the study had been disciplined for misconduct — ranging from putting clients in unsuitable investments to trading on client accounts without permission — its authors found.

Some large, well-regarded firms had misconduct records that far exceeded the average, according to the research team. For example, nearly 20 percent of financial advisers at Oppenheimer & Co. had misconduct records.

So, the financial services industry has a customer relationship problem, and a regulation that would have forced the industry to modify its behaviors in a way that could help with its trust issues has been thrown into limbo. What should smart companies do about this conundrum?

In most large companies, the die is cast: Nearly a year’s worth of preparations can’t be undone quickly, so work to become compliant with the rule continues. That said, any firm thinking it can revert to the status quo — even if the rule were rescinded — should think again.

Easy PR Targets

The DoL rule gives the financial services industry a chance to perform a reset with its customers. The work is largely done in most companies, and being able to recast financial advisers as fair dealers with customers would be a great way to start rebuilding trust.

No firm seized the opportunity before the rule’s initial proposal six years ago to position itself as THE business that emphasized the success of its customers over the commissions of its sales staff, which would have sent a strong signal to customers.

Now, there’s a marketing angle. Even though a firm no longer might be required to have its advisers act as fiduciaries, that is the relationship it should want its advisers have, because it’s better for the customer. If enough financial services industries were to proceed with their compliance plans, reverting back to the earlier model of emphasizing profits over the customers’ concerns would set up a company for negative public attention and snarky competitive marketing.

We all know that just because you can do something does not mean you should do it. When too many financial services pros put their own concerns ahead of the customers, it resulted in the DoL rule. There’s a lesson here for every other business: While it’s reasonable to worry about your sales numbers, you’re going to succeed over the long term only if you can act as a real partner, ally and adviser to your customers.

Trust is a sales multiplier. It keeps customers coming back to you, it encourages them to spend more, and it gets them talking about you in a positive way. If you build it into the culture and processes of your company, you’ll never have to worry about retooling in response to a government rule — which happens infrequently — or fret as a competitor beats you at building trust with customers and your revenues erode — which happens a lot.