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States Attempt to Pick Up Slack of Fiduciary Rule Defeat, Reg BI

The department of Labor’s fiduciary rule was vacated by a U.S. circuit court in 2018. Some states are looking to fill the hole left by that defeat—and fill what they feel are gaps in the SEC’s Regulation Best Interest—with their own state-level fiduciary rules for financial planners and broker-dealers.

Some states had already begun the process of implementing their own rules prior to the fiduciary rule defeat. While Nevada, New York, Massachusetts, Connecticut, Illinois, and Maryland have attempted to implement their own fiduciary rules, New Jersey has been stealing headlines recently, as it recently closed the comment period on its proposed rule.

The Financial Advisor IQ article, “Advocates Clash at New Jersey Fiduciary Rule Hearing,” reported that a final New Jersey rule is expected to be released sometime in the fall.

“State-level fiduciary efforts have swelled up in response to dissatisfaction with the SEC’s new standard of conduct for broker-dealers, Regulation Best Interest,” reporter Ian Wenik wrote in Financial Advisor IQ.

These state-level fiduciary rules could serve as bellwethers for other states and could reach well beyond state lines and impact your firm. Forbes reported, in an article titled “What a New Jersey State-Level Fiduciary Rule Might Mean for Brokers,” that the New Jersey rule would impose a uniform best interest standard on RIAs and broker-dealers alike.

Proponents of the New Jersey rule say it picks up the slack left by the SEC’s recently passed Reg BI, which they say does not go far enough to protect investors. Opponents claim the rule would be at odds with Reg BI and would create confusion for RIAs and broker-dealers that would ultimately end up harming investors. An InvestmentNews editorial noted, “Whether broker-dealers or investment advisory firms like it or not, states have the right to propose such rules.”

Ana TL Headshot_Cropped

Ana Trujillo Limón is senior editor of the Journal of Financial Planning and the editor of the FPA Practice Management Blog. Email her at alimon@onefpa.org, or connect with her on LinkedIn


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Beyond the Blame Game: 3 Steps to Incorporate Responsibility Into Your Business

In today’s climate, many sources are quick to place blame on the reasons for changes in our economy and overall market volatility. Likewise, many advisers have a tendency to do something similar when having to explain to others the state of their business. Statements like, “If the market would cooperate, I would be doing better,” or “Clients don’t see the urgency in getting together while the market is doing well,” are simply examples of excuses for not taking responsibility. The consequence in making those excuses is the possible outcomes. Attending to your clients and their portfolios during both up and down markets is vital.

Ralph Waldo Emerson said it best when he said, “No one can cheat you out of ultimate success but yourself.”

Successful advisers know that true growth is really up to oneself regardless of what is going on both in and out of your control. You must be willing to be honest about what is currently working and not working for you. Then, you must be willing to adjust and adapt to changing conditions. Next, you must decide on what actions will actually guide you toward positive results. Implementing those activities and continually assessing your results will keep you accountable to yourself and prevent the “because of everyone else” blame game.

Let’s take a look at specific steps for how you can incorporate responsibility into your business.

Step No. 1: Be Completely Honest

Honesty truly is the best policy and what better person to be honest with than yourself. However, many advisers find it difficult to admit that they themselves are the true cause of their own not-so-great results. Let me share about one adviser who I’ve worked with to identify his shortfalls and some solutions we utilized for replacing them.

Bill T. is a 15-year veteran financial adviser who found himself on a production plateau. After years of building up a client base, he simply stopped prospecting. His rationale was that he had “made it” and that anyone with his years of experience should not have to prospect. However, his company did not share the same point of view and thus was not happy with Bill’s level of production.

So, during one of our coaching sessions I asked Bill a number of questions to determine his honest view about prospecting. It didn’t take long before he realized that he needed to change his perspective about prospecting from being an obstacle to being an opportunity.

Step No. 2: Adjust and Adapt to Changing Conditions

One of the hardest things to do once you face the truth is to make the necessary shifts in both attitude and tasks. The best way to do this is to create a well-thought-out action plan. Take time to develop it and be realistic about your own expectations. In Bill’s case, he knew he needed to get back to prospecting but had no idea where to begin since it had been quite some time since he had prospected. So, we mapped out an action plan together.

We first determined his target market, which was business owners. Then, we worked on how to approach them by scripting out a formula for what to say during the initial contact. Next, we worked on brainstorming every possible objection he might hear and how to overcome them to set appointments. Finally, we practiced the process so that his first call would sound flawless.

Step No. 3: Implement and Evaluate Your Action Plan

Now it is time to implement in real time and constantly be evaluating (and tweaking) your action plan to fine-tune it to work optimally.

This is best done by determining what time of the day you will do particular tasks and sticking to that blocked time. You also need to allocate the time to record your daily activities and record the outcome on a daily, weekly and monthly.

After several weeks, Bill realized that his pipeline was starting to fill up with qualified prospects that were interested in meeting with him. Organically, he began turning those prospects into clients. His company took notice and asked him if he would be interested in teaching other advisers how he had turned things around.

Why Taking Responsibility Works

The reason why taking responsibility for your own success works is because it’s not anyone else’s responsibility for you to succeed. And choosing to blame the economy, the market, your firm or others will always result in a losing game.

If you would like a complimentary coaching session with me, please email Melissa Denham, director of client servicing.

Dan Finley

Daniel C. Finley is the president and co-founder of Advisor Solutions, a business consulting and coaching service dedicated to helping advisers build a better business.


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Due Diligence Quick Guide for Financial Planners

Due diligence is important whether you are considering a third-party money manager, cloud data storage provider or an office cleaning service.

This quick reference guide can guide you through the development of your firm’s due diligence process. ​

Regulatory Opinion on “Outsourcing”

You cannot outsource your supervisory responsibilities. This means you must make your best efforts to ensure that your vendors are doing what they are supposed to be doing. When you outsource operations and functions, the regulators do not look further than your internal controls—even if the third-party service provider (or vendor) did not perform as promised.

Types of Vendors You Need to Perform Due Diligence

The following is a partial list of the types of vendors you need to perform due diligence:

  • Broker/dealer—custodians
  • Third-party asset managers or sub-advisers (money managers)
  • Mutual funds, limited partnerships and other investment vehicles
  • Portfolio and back office services
  • Compliance consultant
  • Technology—computer services
  • Accounting
  • Proxy voting services

Information Gathering on Vendor

Here is a list of the information you’ll need to gather on your vendors:

  • About the company and history
  • If vendor is a regulated firm (BD or RIA):
    • Obtain Public Disclosure records (from BrokerCheck or IAPD)
    • Obtain Form ADV 2 disclosure documents
  • If vendor is an investment company, obtain prospectus or offering memorandum
  • Financial and managerial strength
    • Obtain financial statements
    • Obtain biographies of managers
    • Evaluate recent changes in management or ownership
    • Litigation/arbitration or other legal history or complaints
  • Services and/or products offered by company
  • What is the workload capacity of vendor to take on a new client of your size?
  • Are you too small a client and likely to be treated as a low priority?
  • Vendor responsibilities—what are their contractual obligations?
  • Responsibilities retained by your firm (or responsibilities assigned to your firm by vendor)
  • Review all contract provisions
  • Recourse if vendor fails to perform as promised (waivers of liability in contract)
  • Conflicts of interest
    • Does your relationship with the vendor create a conflict of interest?
    • Does the vendor have any conflicts with its existing affiliates or centers of influence?
    • Do any conflicts create a disclosure requirement to your clients; or are conflicts too great to overcome and prevent doing business with the vendor?
  • Succession plan
  • What is reputation? Seek references from satisfied clients and inquire with colleagues
  • Schedule on-site visit to vendor to kick bricks and meet management and support staff
  • Document all your data gathering and due diligence efforts to your compliance files

Representations of Internal Controls by Specified Vendors

Vendors that are “critical business constituents” (e.g., banks, custodians and third-party asset managers) must provide you with documentation or a representation of their internal controls on their business continuity plan.

Vendors that have access to personal and confidential client information (e.g., custodians, IT consultants and auditors) must provide you with documentation or a representation of their internal controls on the following:

  • Privacy controls under Regulation S-P (safeguarding information)
  • Identity theft prevention program under Red Flags Rule (Reg S-ID)
  • Cybersecurity plan to protect information; detect and respond to security breaches

As a best practice, this type of information should be obtained from all vendors even if not meeting these criteria.

Conduct Ongoing (Periodic) Due Diligence

Assign the appropriate supervisor to supervise work of the vendor to examine the following things:

  • Is the vendor performing as promised?
  • Have contract provisions changed and need re-evaluation?
  • Have there been changes in management, financial strength or legal matters?
  • Is vendor keeping up with regulatory changes that you must abide by?
  • Has there been bad press?

Todd Skoda

Todd Sakoda brings 20-plus years of experience in the financial services industry ranging from compliance and operations to business development and relationship management. His last 12 years has focused on independent registered investment advisory firms. Over his career, he has also worked with independent broker-dealer advisers and bank investment programs. He is a coach, along with John T. Carr, in the FPA Coaches Corner for Compliance, where this resource guide was first published.  

John Carr

John T. Carr represents financial services professionals to limit, defend and/or deflect liability in regulatory investigations, enforcement actions, arbitrations and court cases pending before Oregon Circuit Courts, Washington Superior Courts and the United States District Courts for the District of Oregon and the Western District of Washington. Carr is known as one of the preeminent legal advisers to financial advisers, having represented hundreds of industry clients over multiple decades. He is a coach, along with Todd Sakoda, in the FPA Coaches Corner for Compliance.