The Grasshoppers of the Fiduciary Proposal


‘Chance favors only the prepared mind’

-Louis Pasteur


As a child, I had a Disney record of stories. I used to sit on the floor with my little Fisher Price record player and listen to that album over and over again. One of my favorite stories was the Aesop’s story of the Ant and the Grasshopper. As a child, I didn’t fully appreciate the story itself; it was the sound effects that primarily caught my attention. The slamming door, the whistling wind, and the shivering of the actors’ voices captured my imagination.

In talking with an ERISA attorney this week, that record popped into my mind.

We were discussing the impending proposal from the Department of Labor that will fundamentally transform the business in a way that we have not seen since the Employee Retirement Income Security Act was passed in the mid-1970s. What struck me about the conversation was the reaction we both had to many financial services firms. There are still a good many that are vowing to fight this issue. There are conversations about suing to have the law thrown out. There are conversations about stripping funding to keep it from passing.

I understand why some firms are opposed to this proposal. The law, as proposed, will demand that broker-dealers tear apart business models and reassemble them in a fashion that is compliant with the new laws. Advisors will need to get trained on the new regulation, the firm protocol, and any new forms that may be necessary. Systems will need to get updated to account for the new policies and procedures. Clients will have to be briefed on any pertinent changes. New forms may be required to be signed by the client. And for good measure, the DOL has deemed that the industry be in compliance within 8 months, if enacted as currently written. That is a lot of work, for no additional revenue, and a great deal of added expense.

However, complaining at this point is a bit like the Grasshopper not preparing for the winter. We know this law is coming. The aggressive time line from the DOL up to this point; the reluctance to extend the comment period; and the public comments from Sec. Perez and Asst. Sec. Borzi: all of these factors underscore that this will happen.

The best thing a firm can do right now is start preparing for these regulations. Here is a quick list of several items that can help to prepare for what we know will hit early next year:

  1. Train. Many advisors have not been held to a fiduciary standard before. The single best thing that a firm can do right now is to start exposing reps who have 401(k) or IRA business to this way of thinking. Training courses like the Accredited Investment Fiduciary (AIF) from fi360 are a great start. For those that already have the AIF, look into the Accredited Investment Fiduciary Analyst (AIFA) from fi360 or the Global Fiduciary from 3Ethos. Training and education is a lifelong process.
  2. Look for plug-and-play technology support. There are several technology vendors right now that can help to streamline the compliance process for this new reality. Aligning with those vendors now does a couple of things. First, it insures that you don’t have to wait in line with the rest of the Grasshoppers. Second, it allows you or your brokers to get familiar with the tool before the laws take effect. Products like G-MAP+ from the Pension Resource Institute can provide a prudent framework for qualified plan business. QPSteno can provide a great documentation process to comply with the new education carve outs and cover your backside in the event of a lawsuit (important to note that the potential legal ramifications have changed under the proposal).
  3. Consult with an attorney. I have had conversations with several ERISA attorneys who have some creative solutions. While we don’t have the final regulations yet, we can operate with 90% certainty on most features. It will be easier to tweak a policy than to try to create and implement one on the fly.
  4. Talk to your clients about it. I saw an interesting study recently that many investors are unaware of what a fiduciary is. While we are obsessing over the regulations, our clients are largely unaware of their potential impact. We have seen similar situations with Fee Disclosure (404a5 and 408b2) and the Pension Protection Act of 2006. In both cases, the advisors I saw who fared the best were the ones who got ahead of it. They began having conversations with their clients about those proposals and how it could affect their relationships. If your client is well prepped, the final regulations should be a non-event.

The preparation does not stop at the firm level. As advisors and professionals, you owe it to yourself and to your clients to continually reinvest in yourself through education. It doesn’t matter what industry you examine: the best always strive to be better. The coming Conflict of Interest rule gives you an opportunity to continue to “sharpen the saw”.

I am well aware that there are firms that have already started down this path of preparation. My hat is off to you. For the rest, don’t get caught by the coming winter. And now that I am thinking about it, I wonder what ever happened to that record…