The financial services profession can present an array of ethical quandaries and predicaments. The American College of Financial Services offers insight and perspective with regard to professional ethical dilemmas.
In this post, The American College Ethicist, Julie Ragatz, the Charles Lamont Post Chair of Ethics and the Professions, Director of the Cary M. Maguire Center for Ethics in Financial Services, and Assistant Professor of Ethics, considers a long-time advisor's concerns over serving clients in a post-DOL rule environment.
The Question
I held my NASD/FINRA Series 7 registration from the 1980s through 2008. Now I am in my early 60s and only have my state insurance licenses. I work exclusively with prospects who are turning 65 and who are enrolling in Medicare and/or Social Security. At this time, I have no intention of becoming an RIA or joining an RIA firm. I am no longer selling annuities, long-term care coverage, or IRAs.
With the DOL rule coming into effect early in 2017, I am not sure if I will be permitted to continue to service my clients’ existing annuities, both fixed and indexed. These are currently held in qualified accounts, and I usually would offer decision opportunities for clients in the near future about whether to continue income riders or whether to elect taking income now. I feel that if I cannot service the account personally, I should notify them of that.
No one has of yet addressed this issue that I am aware of. Can you help?
The Consideration
This situation poses an interesting dilemma, which is related but not identical to the scenario discussed in a recent Ethicist post. In that situation, a financial advisor wanted to know her obligations regarding clients who she anticipated would not be able to afford her services due to potential advisor compensation changes in keeping with the new requirements imposed by the U. S. Department of Labor (DOL) Conflict of Interest Rule. This writer asks about his obligations to those clients whom he may not be able to serve in the same way in light of the new requirements imposed by the DOL rule.
The first point to make is that the rules around servicing products in qualified accounts are different from the rules regarding the sale of products using qualified funds.
The writer clearly indicates that his interest is in the servicing of products. However, he is right to raise the question. Most commentators have focused on the new restrictions on the sale of products using qualified funds. There has been less attention paid to the question of what will change for the financial advisors who are only servicing existing products.
The little attention that has been paid to this concern has mainly focused on the fact that these existing relationships are “grandfathered in.” Specifically, the rule “allows for additional compensation based on investments that were made prior to the Applicability Date.” The grandfathering provision “includes compensation from recommendations to hold, as well as systematic purchase agreements.” However, the guidance provided by the DOL goes on to state that it “requires that post-Applicability Date, additional advice must satisfy best interest and reasonable compensation requirements.”
The important point here is that any financial advisor offering advice regarding an existing annuity product — for example, the decision to surrender the product — will be governed by the fiduciary requirement (or will have to adhere to the exemption requirements) after the DOL rule takes effect.
Perhaps the most relevant point at play here is the requirement of “reasonable compensation,” which would seem to make commission-based compensation problematic. In short, if the writer is compensated on a level-fee basis then it may not be a problem for him to continue to service his existing clients in a professional manner. If the writer is compensated through commission, he would likely have to change his compensation model in order to align with the new DOL requirements if he is to fully service his existing clients after the rule goes into effect in 2017. This is a preliminary response to the question the writer asked, which was what must he tell his clients regarding how the DOL rule will affect his practice.
Researchers reviewed eleven codes of ethics adopted by organizations within the financial services profession. From these eleven codes of ethics, it is possible to identify seven ethical principles that are common to all of them: integrity, objectivity, confidentiality, fairness, professionalism, diligence and competence. The answers to most ethical dilemmas are found by reflecting on these principles. In this particular case, at least three principles seem to be applicable: fairness, professionalism and diligence.
The Principle of Fairness requires that financial advisors determine what they owe their clients based on what they would want for themselves in that situation. In this case, it seems reasonable that most people would want the relevant information needed to make a decision determining whether their current advisor is the best positioned to help them in the future. Financial advisors should disclose as much as they can regarding the ways in which the DOL rule will affect their practice and what the implications will be for the specific client relationship. They should disclose this information in a way that is as easy as possible to understand, and they should also be willing to answer any questions that the client may have.
The Principle of Professionalism requires financial advisors to “uphold the dignity” of the profession. This principle can impose many requirements on the behavior of advisors, one of which is the need to show respect for other professionals. The long debate over the Conflict of Interest Rule has been heated at times, with commentators on both sides disparaging the position of the opposing party. This is not helpful to consumers who are looking to financial services professionals for help in reaching one of life’s most essential goals: financial security for themselves and for their families. In offering these explanations to the client, the writer and others should do their best to remain neutral on the DOL rule change and to express any disagreement in ways that do not demean or disparage their fellow financial professionals.
The Principle of Diligence requires that financial advisors set reasonable expectations, and then live up to those expectations. In this case, the letter writer and others need to be very clear what services they will be able to provide to their clients in the future. If they believe that this service is not adequate to meet the needs of the client, they should state this clearly. They should then be able to recommend a next step for clients to take in order to find a financial advisor to meet their needs.
It all comes down to communication. It can be especially challenging to communicate during a time in which the future is unclear, but perhaps this is when communication is needed the most.
