Issue 1 • May 31, 2011

For many advisors who aren’t already acting as fiduciaries, change is in the wind. Although the Securities and Exchange Commission hasn’t set new rules, it will begin exploring the possibility of imposing a uniform fiduciary duty sometime after July 21, the one-year anniversary of Dodd-Frank. It is widely expected in the industry that there will be a uniform standard, meaning many advisors will likely have to make a number of adjustments to the way they do business. Here are some concrete steps advisors can take now to be better prepared for new rules when they come.

Understand what a fiduciary is

Simply put, the fiduciary standard requires advisors to act at all times in the best interest of clients. The duty of loyalty owed to clients under this standard also includes disclosure of how the financial advisor is compensated and any conflicts of interest.

Many advisors understand this definition on a surface level. However, there are many nuances that those who aren’t currently serving as fiduciaries need to know and understand. For that reason, it makes sense for advisors to educate themselves. There is a plethora of basic information available online, or advisors could consider taking specialized training on the subject.

Identify areas where your activities may be inconsistent with a fiduciary standard

Advisors should look at the things they do now and try to identify what’s going to be different under a fiduciary regime, says Blaine Aikin, chief executive of fi360, a Bridgeville, Pa., company that trains advisors to be fiduciaries.

For example, when selecting investments, advisors should consider whether they are picking the right things for the right reasons. They also should consider instituting an ongoing monitoring process to ensure that all clients’ accounts are being looked at, ideally on a quarterly basis, Aikin says.

Advisors also should start reviewing the types of products they offer to see what potential conflicts of interest exist, says Ethan Cohen, a partner in law firm Schiff Hardin’s securities and futures regulation practice group. While a proprietary product won’t necessarily be off-limits, “you have to understand how that product compares and what conflicts may have to be disclosed,” the Atlanta-based attorney says.

Document everything

You don’t have to wait until regulations change to start taking better notes of your communications with clients. The best thing is to go paperless, using the features of your customer relationship management (CRM) system to document communications with all of your clients—not just your best ones, says Steven M. Samuels, head of global advisor communications at Bank of America Merrill Lynch.

Documentation is particularly important because, under a fiduciary standard, the duty of care owed to a client is ongoing. It is a higher standard than suitability, which many advisors are governed by today. Under the suitability rules, brokers need only determine if a security is appropriate at the point of sale.

Under fiduciary rules, though, with an ongoing duty of care, advisors must be able to show through documentation that they are monitoring clients’ accounts on a regular basis and having discussions with clients. Even if advisors recommend no changes to an account that, too, should be documented, as well as the rationale behind the advice.

“In a fiduciary world, recommending that clients don’t buy or sell a particular item can be as important as recommending that they take action and invest or divest from a particular area,” Samuels says.

Proper documentation should include any comments and concerns discussed with clients. It’s also especially important to document instances where a customer goes against a broker’s advice, says Robert D. Friedman, a securities litigator and partner with the Boston law firm Burns & Levinson.

Make sure your policies are consistent

Think about how you service your best clients and how you can prepare to do that for your entire book, says Samuels of Bank of America Merrill Lynch.

If you find your business too unwieldy to provide consistent service, it might be a good time to “segment your book to make sure every client has that optimal experience,” he adds.

Start to act like a fiduciary

Just because your business is mostly transactional in nature, there’s no reason you can’t start to act more like a fiduciary.

“It’s a different mindset,” says Friedman of Burns & Levinson.

If you’re not already doing so, it’s a good idea to start focusing more on the bigger picture, even for clients who simply buy and sell stocks. In a fiduciary environment, “the rep is really going to have to understand the information, instead of just filling out a form and sending it to compliance,” he says.

Indeed, becoming more engaged with clients is a strategy that makes sense, according to Bruce Harrington, director of sales and investment strategy at John Hancock Financial Network in Boston. “That does take more time, and it does take more probing and fact-finding with the client, but I think it leads to a better client experience, and it can help advisors be more holistic,” he says.

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