C2P

The Pursuit of Best Interest Advice Requires a Best Interest Process

Published May 16th, 2019 in Blog |

In early May 2019, Alexander Acosta, the Department of Labor Secretary, stated that the DOL is working with the SEC to resurrect the fiduciary rule. This is not a surprise to those of us who follow this ever-changing proposed legislation.

As advisors, we know a best interest standard is a good thing, but what does it mean to our businesses? More compliance, more paperwork, reduced efficiency, lower revenues?

It depends on whether you have a documented best interest process.

So what exactly is a documented best interest process?

Let’s break it down:

Documented is defined as a record (something) in written, photographic, or other form.

Best Interest is defined by the DOL as being required to make prudent investment recommendations without regard to one’s own interests, or the interests of those other than the customer; charging only reasonable compensation; and making no misrepresentations to their customers regarding recommended investments.

Process is defined as: a series of actions or steps taken in order to achieve a particular end.

To summarize, it is a written process one takes the client through to validate how the presented recommendations were determined, and how those recommendations are in the client’s best interest.

How do you ensure you have a Documented Best Interest Process?

The DOL stated that:
“This is not a search for subjective good faith –a pure heart and an empty head are not enough.”

But they did say that:
“…advisers can usually prove they have acted in clients’ best interest by documenting use of a reasonable process and adherence to professional standards in deciding to make the recommendations and determining it was in client’s best interest…”

Regulators and enforcement (attorneys) that find you have followed a documented process with all the evidence on how and why you arrived at your recommendations will likely dismiss the case (unless gross negligence took place). This makes the need to standardize your sales
process, including all steps of data-gathering and justification on the recommendations provided, an absolute essential.

If you do not already have a detailed, documented, step-by-step process, now is the time to put one in place. There are many steps associated with creating a plan and all data-gathering needs to happen in a formalized manner so you can validate, if needed, why recommendations were made with procedural prudence. Producing a written financial recommendation not only provides the documentation needed to cover best interest requirements, but it also provides your clients and prospects with peace-of-mind and confidence in their financial plan and your recommendations. Since market changes and media headlines constantly influence the emotions of investors, a tangible outline can serve as a touchstone to help maintain long-term investment strategies and client relationships while also upholding best interest compliance regulations.

A few of the data-gathering documentation tools recommended and available through Clarity 2 Prosperity include:

  • The Fact Finder: Establish concerns and priorities and identify what planning has or has not been completed
  • Asset Sheet Questionnaire: Systematically collect the comprehensive data needed to create and document a holistic plan
  • Income Gap Assessment: Quickly and clearly identify future investment income needs for retirement and how much of your client’s income gap they would like guaranteed
  • Volatility Tolerance Analysis: Identify and document an in-depth perspective of your client’s true volatility tolerance by individually reviewing each of the three segments of their savings and scoring them separately
  • Packaged Plan Deliverable: A simple way to package your planning and recommendations into an easy-to-understand template
The Bucket Plan® Best Interest Process

The Bucket Plan Best Interest Process is a complete client engagement and educational experience. It can be used as a stand-alone process or as part of a full financial plan. While it does set the stage for retirement income distribution planning, it can be used at any point in a person’s life for financial planning.

The Bucket Plan is not solely meant to “bucket” a client’s money for different types of income or expenses. Rather, it compartmentalizes assets to efficiently ensure liquidity, maximizes potential income distributions, minimizes taxes, eliminates sequence risk, and maximizes growth and legacy planning opportunities, all while ensuring that certain risks associated with behavioral finance are minimized. We accomplish this by establishing three phases, or buckets: the immediate (Now), the short term (Soon) and the long term (Later). The Soon Bucket provides an income source for a person during the earlier years of retirement, buying an income bridge or floor to invest the rest of their money in the Later Bucket so inflation doesn’t derail their long term retirement plans.

The Bucket PlanEach phase has a different time horizon, giving each a different risk profile. By approaching bucket planning with this in mind, you can be truly strategic in advising a client on the financial solutions that will help maximize their income while focusing on minimizing controlled risks such as market volatility, sequence of timing of returns risk, inflation, taxes, longevity, and estate transfer.

The Bucket Plan Best Interest Process has six steps or tools to use with your clients when coming to a final plan and recommendation, including:

  • The Money Cycle: Educate your client on the three phases of the money cycle, along with the biggest mistakes we see clients make – skipping the preservation phase
  • The Bucket Plan Presentation: Package a financial plan in terms a client can understand
  • The Asset Sheet: Gather comprehensive information about their liquid investable assets segmented by tax qualification
  • The Income Gap Assessment: Determine the “income gap” between retirement income sources and retirement income needs
  • The Volatility Tolerance Analysis: Discover the amount of risk a client is comfortable with in each bucket in order to make suitable recommendations
  • The Pyramid of Risk: Educate your client on the level of risk associated with various types of investments and show them where they are with their current allocation

The Bucket Plan Best Interest Process identifies a client’s comfort level of risk in each bucket and gives you a full picture of all their investable assets so you can provide holistic and thorough financial advice with a keen eye towards tax efficiency. It simplifies the client experience through the planning and sequential steps, giving them the knowledge, comfort, and confidence to move forward with your recommendations.

The Bucket Plan Best Interest Process provides a deliverable to the client—further differentiating you from “other” advisors, agents, reps, and planners who are simply selling products.

By implementing The Bucket Plan Best Interest Process, you will have documented the evidence and met the best interest standard while simplifying financial planning for your clients. This simplification, in turn, will lead to more prospects hiring you for plan implementation.

The best part is that this process doesn’t require complex financial planning software or stacks of additional paperwork. We all want to do what is in the best interest of our clients, but just saying it isn’t enough. We need to document the evidence to protect ourselves from the unknown that could come as regulations become more and more complex.

Delve into the Bucket Plan Best Interest Process by downloading the white paper below.

 

Dave Alison

Dave Alison, CFP®, EA is a founding partner of C2P Enterprises, driving a vision to help financial advisors across the United States simplify financial planning. Dave’s professional capabilities to coordinate tax, financial, insurance and estate planning needs are what led him to found Alison Wealth Management as a boutique tax, financial planning & investment management firm bringing household CFO services to affluent families & high-income professionals across the United States.