Protect Yourself with the RIGHT DOL Rule Documentation

The U.S. Department of Labor's (DOL) fiduciary rule requires compliance starting in April 2017, when advisors and investment firms must begin properly documenting their actions to comply with the rule's best interest measures. For advisors to meet the fiduciary standard, certain professional duties are required. Being a fiduciary requires prudence, loyalty, accurate recordkeeping and immediate reporting in the case of a co-fiduciary breach.

Below are tips for financial services professionals to ensure they submit the proper documentation, and an overview of what could happen if the proper documentation is not correctly executed.

Tip: Document Everything

Accurate record keeping is paramount to advisors seeking fiduciary compliance. Financial advisors rely on proper documentation to prove they're meeting fiduciary standards and to protect themselves in case of litigation. Even initial DOL litigation is comprehensive and can be expensive — avoiding it altogether is well-advised. If an advisor has accurately detailed paperwork in order at all times, they will be prepared in the event a dispute or complaint is made.

Proving prudence requires thorough documentation that must include:

• Why the decision was made
• Careful documentation of the client's goals
• How the recommendation/s meet the client’s goals
• Whether or not alternative strategies were considered and why they were not ultimately chosen

Once prudence has been established, advisors need to cement and prove their loyalty to the best interest of their client, an effort that may include a client signing documents. Advisors can solidify their position of loyalty through follow-up meetings, notes, and client calls. Rollovers are a particularly contentious recommendation for advisors to make because they require extensive documentation and assessment to meet the fiduciary standard's record keeping duty.

Advisors making rollover recommendations need to make sure they include detailed documentation explaining why the funds were moved out of a qualified plan. Investment assets tend to cost less when in a qualified retirement plan, so for an advisor to recommend moving assets out of the plan, proving why the recommendation is in the client's best interest is critical. If recommending a rollover, it's important that advisors thoroughly document any other rollover options, asset allocation, and diversity information.

Recommending variable investment products may invite additional discussion and documentation to meet a fiduciary standard. In the case of such products, clients often need education. There's more required to being a fiduciary than proper documentation; it's an ongoing process of keeping a client’s best interest as the highest priority. Advisors must educate clients wishing to purchase a variable product. Some investors don't realize there's a possibility of losing money by making this type of purchase. After educating the client about their options, advisors need to document that the education did in fact occur.  

Tip: Keep Accurate Client Records

Knowing what to document is just one part of a fiduciary's responsibility. The records must be kept accurate and up to date. Thankfully, there is technology to help financial advisors manage such massive amounts of confidential client information. Client records are usually kept in a firm's customer relationship management (CRM) system. Smaller firms or independent advisors who don't have proprietary CRM systems have the option of using financial planning software designed for this kind of documentation and record keeping.

When using a firm-wide CRM system, record everything — every recommendation, email, phone call, face-to-face meeting, anything — the goal is to have documentation that shows a pattern of fiduciary action.

Financial advisors who use financial planning software should follow the same principles. In addition to showing a fiduciary pattern and documenting everything, advisors who use software should:

• Archive and keep old plans  
• Make electronic copies of everything
• Use software that integrates with other technologies and auto-populated data to lessen the chance of human error

Tip: Don’t Turn a Blind Eye

As set forth in The Employee Retirement Income Security Act of 1974 (ERISA), fiduciary advisors are charged with a duty to “mind the business” of fellow fiduciaries and to report any breaches. Under the co-fiduciary rules, an “innocent” fiduciary who has knowledge of another fiduciary’s breach can be held liable for that breach, even if they aren’t a fiduciary with respect to the matter giving rise to the breach. As soon as a fiduciary has knowledge of another fiduciary’s breach or an imminent breach, the only way to avoid liability is to undertake “reasonable efforts” to remedy the breach. The main takeaway for fiduciaries is that they will not avoid liability by simply doing nothing.

Aside from proper documentation, accurate record keeping and addressing co-fiduciary breaches, advisors should take care to protect themselves when conducting business as usual. Advisors must operate as if they will eventually end up in litigation, keeping thorough documentation as if they will be sued. When dealing with clients or their heirs, there must be clear documentation as to why decisions were made. If a decision was made resulting in a lessened inheritance, it must be documented thoroughly. Failing to meet one's fiduciary responsibilities can lead to litigation and penalties but with the right kind of documentation, financial advisors can provide recommendations that align with their clients’ best interest as well as their own.

Gain more insight into the DOL fiduciary rule and how it’s changing the financial services profession by reading 5 Things You Didn’t Know About the DOL Conflict Of Interest Rule But Should.