Looking at the DOL Fiduciary Rule Through Multiple Risk Lenses



May 18, 2016

Many firms are in the midst of completing their initial risk assessment, documenting areas that will be impacted by the new DOL Fiduciary rule. Identifying the risks is key, and prioritizing them is as important to ensure a successful implementation.

We believe there are four distinct risks a firm will face over the next 24 to 36 months – some of them are already creating issues and opportunities in the marketplace.

  1. Regulatory risk is the failure to comply will the regulatory rules as set forth in the DOL Fiduciary Rule. This risk exposes the firm to sanctions, fines, and reimbursement for losses. Implementation is challenging because the firms do not only have to break new ground to comply with the DOL’s Fiduciary Rule; they must also remain focused on FINRA’s, the SEC’s, and other regulatory organizations’ initiatives to drive a fiduciary standard throughout the financial services industry. For example, the SEC announced they will be coming out with their version of fiduciary rules later this year. There is consternation in the industry that the SEC will take a different viewpoint from the DOL and that additional processes will need to be implemented.
  1. Operating risk is the probability of loss occurring from the internal inadequacies of a firm or a breakdown in its controls, operations, or procedures. Changes in how business will be processed in the future will need clear documentation, training, and perhaps most importantly, acceptance of processes by a firm’s employees. This rule will change how many employees work, and change is difficult for most people. Recognizing and addressing the change continuum will help implementation be more successful.
  1. Financial risk is the financial impact to the firm for completion of an activity that creates a financial loss for the firm and / or the client. Comprehensive and ongoing training and communications are important to ensure each process detailed in the target operating model works as designed. Financial risk creates a potential for additional litigation. Even when firms have checked all of the compliance and disclosure boxes, they may still face arbitration and potential lawsuits from clients from financial losses that occur. Clear processes, documentation on how decisions were made, and training on how to make investment decisions and how to clearly communicate with clients are necessary to ensure activities are completed correctly. These actions can serve as some documentation that the firm earnestly maintained the best interest of the client.
  1. Reputational risk occurs when there are activities and / or conversations that can damage a firm’s reputation. This risk can result in lost revenue, a decrease in shareholder value, or both. A strong communication plan of both reinforcing a firm’s value proposition and explaining the rule and its impacts is a key risk mitigation factor. If clients and advisors experience a bad experience as a firm rolls out its fiduciary changes, mistrust and frustration can increase, which can lead to retention issues.

The biggest immediate risk for firms is reputational risk. The reputation of a firm in the eyes of the client, advisor, and employees is critical. Trust will be tested; a lack of it will tarnish even the most stellar reputation. While firms are gearing up for April 2017 and January 2018 implementation dates, there is no implementation deadline for making a good impression with clients and advisors; they can leave the firm and advisor at any time. Some large firms are proactively managing the message to their clients early on. Such communication shows clients that the firm cares to let them know of the change and shows advisors that their firm is a market leader.

There have not been clear winners or losers identified, yet, in the industry’s transition to a fiduciary standard. There are many strategies to implement, beyond the compliance disclosures, to help mitigate all of the risks identified above. But, it is possible to address all of these risks in the timeframes needed. Advisors and clients are waiting for a clear path forward. It is incumbent upon the firms to over-communicate, over-train, and over-deliver on a great experience. Otherwise, it will not matter if all of the correct boxes are checked for compliance purposes – if advisors and clients leave, it will be game over for firms.


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