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Wednesday, August 4, 2021

5 Ways to Explain Fiduciary Duty to Your Prospects and Clients

There’s a lot of talk out there on what it means to be a fiduciary and how it is beneficial to the clients to understand the difference between who is and who isn’t. But how can you actually explain this to a potential prospect of even your current clients? We’ve thought up of a few ways and talking points for explaining to them what fiduciary duty really means below:

Their Best Interest is in Your Best Interest

Whether it’s as a 3(21) or 3(38) fiduciary to a retirement plan, or just as an RIA to an individual client; being a fiduciary carries a lot of meaning and weight. This means that as an advisor you are guaranteeing the client that you will always be looking out for their best interest. The exact meaning of this can be debated, but what it really comes down to is that as a fiduciary you’ll be treating the client’s best interests as your own. You will be prioritizing the best options for them above all else because that is your interest as a fiduciary. Lacking in your fiduciary duty can have real consequences, so letting them know that you are looking out for them should always be at the top of your priorities.

Outsourcing the responsibility to a professional

Some plan sponsors can pass the fiduciary responsibility onto a financial advisor or a plan professional as a 3(38) fiduciary. However, the plan sponsor still retains some fiduciary responsibility. The plan professional can take the fiduciary responsibility for the plan investment choices. If the plan professional is a fiduciary then they should be fee only which will also reduce further fiduciary risk surrounding fees.

However the plan sponsor must still retain fiduciary responsibility for documenting the selection process and monitoring the services provided to determine if you need to make a change. Once selected, the plan sponsor must continue to review the service provider’s performance, read any reports, check the fees charged, managed participant complaints and inquire about policies and conditions.

As a 3(38) Fiduciary, you’ll be essentially taking a lot of the responsibility from the plan sponsor in their retirement plan. This means you’ll be entrusted with all of the responsibility for investment choices available to participants. However, the plan sponsor will still need to keep an eye that the 3(38) fiduciary is fulfilling their fiduciary duty.

Fee-only vs Commission: Fiduciaries avoid conflicts of interest

Another way to explain fiduciary duty is to go over the advisory compensation structure. There are advisers who work off commission and those who work off fees. If the adviser’s compensation is commission-based, than service fees are embedded in the cost of products. The fee-based model has adviser’s compensation fixed. As a fiduciary acting in the best interest of the client, it makes sense to emphasize that you are not looking to sell any product which has the highest price tag, but rather the best suitable product  that would serve the client’s needs.

Smart approach to IRA Rollovers

Many advisors who serve retirement plan clients also provide services to plan participants who roll their balances over to IRAs, for example when participants retire or change employers. Recommendations that would trigger ERISA fiduciary status, including whether, in what amount, in what form, and to what destination a rollover, transfer or distribution should be made.

You may select to limit your rollover consultation to educational service and refrain from making rollover “recommendations”. Those who choose to make rollover recommendations and avoid engaging in a prohibited transaction should consider structuring their services to comply with one of the prohibited transaction exemptions included in the statutes or granted by the DOL – The Best Interest Contract Exemption (BICE). It’s one of the exemptions released in conjunction with the DOL Conflict of Interest rules and may be relied on when making rollover recommendations.

Timely Updates on Retirement Plan Changes and Online Consulting

Any 401(k) plan advisor, as a fiduciary, should keep track of their client’s investments, and provide timely advice on what steps should they take to keep their balance at the highest level. Retirement plan investment options, whether they are represented with mutual funds, stocks or common collective trusts, can undergo some changes. If a plan assets start underperforming and a client starts losing money, an advisor must contact the client immediately and notify about the situation. Acting in the best interest of your client means not only behavior focused on the well being improvement, but it also includes timely response in case of any threat or bad financial scenario leading to any unwanted consequences, such as excessive fees and money loss.

There are lots of ways that fiduciaries aide their clients and help safeguard their nesteggs, but driving home the value and meaning of this to clients and prospects may be tricky. Above all, explaining the trust and raw value that this brings to a client that you are strictly obligated to look out for their best interest may put their mind at ease.


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