Why Multiple Systems are Killing Your DOL Compliance

Published by Shawn Gillespie, Director - Senior Account Executive, Business Development
February 23rd, 2017

With the Department of Labor’s (DOL) fiduciary rule set to take effect this April, financial firms are facing extensive changes. The new regulation requires that advisors prioritize their clients’ best interests, operating on behalf of their investors with increased transparency. A wave of new rules will set strong parameters to reduce risks for investors, but with it comes several challenges for firms that lack the controls or resources to accommodate the regulation.

The recent change in administration is expected to delay the law’s pending April implementation, but most wealth management firms are moving forward with designing and rolling out compliance efforts to better serve their clients. The new regulation poses a unique opportunity for firms to pursue improvements in serving their investors and boosting efficiency across their organizations.

 

Preparing a Compliance Strategy

To create a compliance strategy, organizations should first evaluate where their firms stand in relation to the new rule by examining how many clients and advisors the law will affect. These numbers will shape how they design their compliance strategy. This information will also determine how they will move forward with educating investors and training advisors on the rigors and benefits of the tighter standards.

The types of accounts affected by the new DOL regulation are central to determining a compliance strategy. Retirement accounts will absorb the chief impact in brokerage firms, with 401(k)-to-IRA rollovers earning special scrutiny. Past reports of advisors recommending rollovers that were high risk or failed to serve clients’ best interests have put IRAs under the microscope. For many organizations, the number of retirement investors advised will determine the full scope of their implementation strategy.

HSAs, Archer MSAs, and Coverdell ESAs are other accounts the new DOL rule will touch. Of particular interest are the compensation models and payment practices currently in place for all accounts affected by the regulation. As organizations transition to ensure compliance, fee structures may change to conform to a new definition of “reasonable compensation.”

Once organizations assess the scope of the law’s impact on their clients and accounts, they have a foundation for determining what type of support they require to enable their move into compliance. Some wealth management firms may have experts in-house who can oversee the most crucial aspects of compliance. Others find they need to tap external expertise, particularly for managing the legal and technological aspects of DOL compliance. 

When surveying the impact of the rule and planning for compliance support, it is not uncommon for wealth management firms to feel overwhelmed by the scope of change required of their organizations. For small firms in particular, manpower and budget become pressing concerns. It can be a huge challenge for many to invest in the necessary support, but the cost of non-compliance is also steep, both in fines and in the negative blow to an organization’s reputation. More savvy wealth management firms will rely on technology systems already in place to assist in achieving compliance.

Systems and Challenges

Most firms already utilize numerous systems for retaining and examining data that relates to all their customers and accounts.

  • CRM systems capture and analyze information about investors. They are useful in cultivating lasting customer relationships and can help firms sort through data that indicates whose accounts will be affected by the new fiduciary rule.
  • Accounting systems enable firms to track, evaluate, and report on all financial transactions. They can help wealth management organizations segment accounts based on payment practices to assist with achieving compliance.
  • Performance measurement systems help wealth management firms plan and optimize their organizational finances. As firms move toward compliance, they are invaluable to budgeting and supporting efficiency.
  • Document storage systems are electronic repositories that contain all of a firm’s most critical documentation. They simplify proof of compliance by enabling quick, easy access to paperless versions of the documents required by regulators.
  • Electronic signature systems streamline the approval process for financial agreements and store their corresponding records, which can be easily retrieved to support compliance measures.

Many firms have the data they need to guide their compliance strategy, but they are challenged to analyze it and move toward compliance because the array of systems that store it are numerous and disparate. In many cases, wealth management firms rely on third-party providers to manage some of these systems, making data mining even more difficult.

One of the most significant compliance-related challenges for wealth management firms is not necessarily gathering the data. The information required is often at their fingertips, but disparate systems make it extremely difficult to cross-reference and assimilate the large amounts of data needed to drive compliance strategy.

Compliance Implementation Tips

To implement a compliance strategy, there are key recommendations that can help ease wealth management firms through tough transitions. Big changes are daunting to make, but smart approaches can help push organizations over many of the hurdles to compliance.

First and foremost, firms should actively engage in industry-wide forums on the topic of DOL compliance. There are numerous firms all across the country that are tackling the same issues as they bring their organizations into alignment with the new law, and forums afford them the opportunity to collaborate, share expertise, and head off potential mistakes.

Firms should also tap into the existing network of services and professionals that support organizations already bound to the fiduciary standard. There is an established framework in place for achieving compliance with the fiduciary rule. It can be hugely beneficial for organizations to explore relationships with fiduciary experts who have the knowledge and tools to facilitate compliance.

When leveraged appropriately, the technology tools most financial firms employ are effective solutions for becoming compliant and demonstrating abidance to the DOL regulation. The most effective solution for streamlining and simplifying compliance is an integrated platform that includes:

  • Investor information and profiles
  • Investment account information and profiles
  • All documents executed to support the DOL rule
  • Electronic signature records

Unifying all regulatory information in one system that affords direct, easy access to data and records that verify compliance is the best way for wealth management firms to execute a compliance strategy and simplify regulatory audits.

Honoring Best Practices

Though the details remain unclear as to how the DOL legislation may change, proactive compliance is the most prudent course of action. Proceeding with compliance measures empowers firms to maximize the investments and strides many of them have already made toward bringing their practices into alignment with the law. It also ensures greater security for investors, which is a significant benefit in such a competitive market.

Contact First Rate to find out how you can benefit from a unified platform.

About the Author: Shawn Gillespie is an Account Executive at First Rate, Inc. and helps investment firms and advisors solve their toughest challenges with innovative technology solutions.

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