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Exclusive Interview: Blaine Aikin says DOL Fiduciary Rule’s “Lasting Impact Lives On”

Exclusive Interview: Blaine Aikin says DOL Fiduciary Rule’s “Lasting Impact Lives On”
April 30
00:03 2019

We’ve had the pleasure of knowing Fi360 executive chairman Blaine Aikin for many years. Indeed, he’s been featured in our monthly “Exclusive Interview” series twice before. You can see these earlier interviews here: “Exclusive Interview with fi360’s Blaine Aikin: DOL’s Fiduciary Rule ‘Takes Advisors to a Fork in the Road’,”, October 18, 2016 and “Exclusive Interview with fi360’s Blaine Aikin: Competitive Forces Favor Fiduciary Standard,”, June 18, 2013. (Apparently, we get the itch to interview Blaine every three years, so…)

 Blaine joined Fi360, the nation’s leading provider of fiduciary-related education and technology, in 2005 as chief knowledge officer, became chief executive officer in 2007 and was named executive chairman in 2015. He led the rise to prominence of the company’s professional development capabilities, investment management platform for advisors and business research and practice management services that help advisors and financial institutions profitably gather, grow and protect investor assets.

 Those of you attending Unified Trust Company’s Annual Advisor Symposium (May 16th & 17th) may want to see Blaine there. He’s scheduled to present on Thursday, May 16th at 1:15pm. His session is titled “The Shape of Things to Come” and he’ll be taking a deep dive into the latest regulatory, litigation and professional standards-setting developments that are shaping the future of the industry.

FN: Blaine, it’s been nearly three years since we’ve had a chance to feature you in our monthly exclusive interview. What’s new on your end of things?
Aikin: Three years is a long time and yet it has gone by in the blink of an eye.

I continue to focus on helping to advance the profession of financial advice, primary through my work at Fi360 and on a volunteer basis at CFP Board. At the end of 2015, I transitioned from CEO of Fi360 to become Executive Chairman of Fi360. At that time, Bill Mueller advanced from his role as our COO to the CEO position and has built out our outstanding leadership team. Collectively, they have been doing a terrific job of expanding and strengthening our capabilities and our reach to essentially all dimensions of the advisory space.

In 2017, I served as Chair in my fifth and final year as a Director of CFP Board. I continue to contribute to the work of CFP Board by now serving as Chair of the Standards Resources Commission (SRC). The SRC is tasked with providing guidance to CFP® professionals on the new Code of Ethics and Standards of Conduct that was developed by the Board over the past few years, officially adopted in 2018, and will take effect on October of this year. The keystone change in the new Code and Standards is that CFP® professionals will be required to adhere to a fiduciary standard at all times when providing advice, as opposed to just when providing financial planning.

In the past two years, I have become more deeply involved in CEFEX (Centre for Fiduciary Excellence). CEFEX was cofounded and is majority-owned by Fi360. I’m excited about the role CEFEX plays in verifying conformity to fiduciary and fiduciary-related standards of conduct by investment advisers, stewards (e.g. retirement plans, non-profits, and similar entities), and managers. In doing so, it promotes excellence in those organizations and allows them to be recognized in the marketplace as being worthy of the trust and confidence of clients and prospective clients. I now serve as Executive Chairman of both Fi360 and CEFEX.

FN: Tell us about some of the new initiatives at Fi360.
Aikin: I going to let Fi360 CEO Bill Mueller chime in on this one. Here’s what he says:

“We’ve made significant investments in our software and data product offerings. Late last year we launched Fi360 Business Intelligence. This is a dashboard that delivers aggregated plan data to help large broker-dealers and RIA firms set strategy, increase operational efficiency, and reduce liability. Fi360 aggregates data from an actively growing list of more than 100 recordkeepers, custodians, and third-party providers. The consolidated data provides a visual, quantitative view of advisors’ operations, solving a tremendous challenge both in precision and time. Today, home offices, OSJs, and business leaders are using the Fi360 Business Intelligence tools to evaluate key data such as advisor compensation, share class utilization, plan menu quality, investment expense ratios, and Fi360 Fiduciary Score® rankings.”

“In January, Fi360 took a leap forward in helping advisors bring a sound due diligence process to the evaluation and ongoing monitoring of stable value funds within their clients’ portfolios. The Fi360 Stable Value Vision features the ability to perform in-depth analysis and side-by-side comparison of funds by criteria such as product type, investment strategy, and platform availability. Fi360 now collects, manages, and publishes a data set of more than 55 stable value funds on a quarterly basis, bringing increased transparency to one of the most popular, yet least understood, asset classes in retirement plans.”

FN: Before we dive into things, let’s do a post-mortem. What went wrong with the DOL’s Conflict-of-Interest (a.k.a. “Fiduciary”) Rule? Do you feel, if it wasn’t vacated, that it would have been able to live up to its hype?
Aikin: I think “post-mortem” is too dark of a framework for discussion of the DOL Rule because it made a lasting impact and parts of it live on. The Rule elevated and expanded the level of discourse about why advice is inherently a fiduciary function. The level of control exercised by a professional advisor is such that clients deserve higher required standards of ethics and competence than the basic rules of a transactional marketplace.

The fact that the DOL Rule moved all the way to and through implementation forced many firms to change their business practices in a fiduciary direction. It also caused more firms to require those who render retirement advice in their organization to accept ERISA fiduciary status and act accordingly. Most have not turned back from the positive changes they made.

A temporary (but ongoing) non-enforcement policy permits non-level compensation using what’s left of the DOL Rule’s Best Interest Contract Exemption (BICE). Specifically, the BICE remnant of the Rule obligates an advisor to accept fiduciary status and implement Impartial Conduct Standards. I believe this provision will be made permanent in a new rendition of a DOL fiduciary rule that will come out after the SEC releases a revised version of Regulation Best Interest later this year.

Importantly, the concept of Impartial Conduct Standards that was formally established by the DOL Rule gave greater definition to the process-orientation of the fiduciary standard. I expect to see this concept mimicked in future fiduciary regulation at the state and federal level.

It is also worth noting that Fi360’s Prudent Investment Practices handbooks are an elevated form of impartial conduct standards. The Practices are fully substantiated in fiduciary laws and regulations and covers fiduciary best practices. Fi360’s Practices form the basis of the educational, tools, and analytical capabilities we provide, as well as the standards that CEFEX uses to assess and certify organizations. Earlier this year we released an updated version of the Prudent Investment Practices Handbook for Advisors. The new version of the Stewards Handbook will be released soon.

FN: In the wake of the DOL’s attempt to broaden the fiduciary standard, the SEC has stepped in with its Regulation “Best Interest” proposal. We don’t know how it might play out. What are your thoughts and predictions on this?
Aikin: My views on “Reg BI” has three dimensions.

First, Commissioner Hester Peirce had it right when she said that they should have called it “suitability-plus”. It is not a fiduciary standard, but it does embody some fiduciary principles and could improve investor protections for transaction-oriented relationship. It could replace FINRA’s suitability rule. That concept could have been simply stated and received wide support from consumer groups.

Second, “Reg BI” is fatally flawed because, although a central purpose of the rule was to reduce consumer confusion about the differences between standards for transactional and advisory relationships, it adds exponentially to the confusion. The rule attempts to draw a distinction between the two by describing arbitrary differences in types and degrees of advice. It skirts the critical distinction – advisory relationships involve reliance and control that makes clients extremely vulnerable to the direction provided by the professional versus sales relationships that are geared to counterparty transactions in which customer should know that they are operating in a “buyer beware” situation with a salesperson.

Third, regulations set the bar low on conduct and are notoriously difficult to set with certainty due to shifting economic and political winds. If your focus is on meeting the low bar of regulatory compliance, odds are high that you are not successfully differentiating yourself as exceptional in the marketplace.

While some predictions can be risky, I feel confident in offering a few. We will soon see a new rendition of Reg BI. It will be hotly contested and subject to considerable change in the short and long term as the economic and political winds shift. Most importantly, it will pale in significance to the imperative for advisors to understand that meeting what is unquestionably all clients’ greatest expectation – competent and ethical advice that places their interest first – ultimately wins in the marketplace. Focusing on professionalism is a win-win formula for client and advisor success.

FN: Talk about disclosure. Why doesn’t it work as intended? Is there any reason to believe it could ever work, or do regulators prefer it simply because it’s very easy to measure?
Aikin: Disclosures are always necessary but are rarely sufficient and effective for use by individuals. As we know, few people take the time to read them.

While disclosures are typically dense and confusing, without them clients have no real possibility of making truly informed decisions. Additionally, one of the highest value of disclosures is to provide third parties the ability to process information to make it more actionable. For example, data gathered from required compensation and expense disclosures can be processed by third parties to facilitate benchmarking of investments and service providers. Fi360 does this.

FN: The states don’t seem to have a lot of patience with the federal government when it comes to some matters. Let’s talk about two of them. First, state-based fiduciary rules. What is the risk of having a hodge-podge of different state fiduciary rules (akin to the hodge-podge of different state insurance rules)?
Aikin: While I am concerned about inconsistencies across state laws, state fiduciary initiatives serve at least four positive purposes. First, they increase investor protection in those states. Second, firms operating in multiple states are likely to move their practices to the highest state-level rules they face, broadening the scope of investor protection. Third, the threat of inconsistent state laws puts pressure on federal regulators to provide a comprehensive solution. Fourth, state regulators have a history of acting collaboratively by formulating model laws that are designed to create consistent regulation. If the federal government lacks the will and ability to act decisively in the public’s best interests, perhaps the states will ultimately find a way to accomplish this.

FN: What’s the greatest litigation risk facing 401k plan sponsors and fiduciaries in general right now?
Aikin: Duane Thompson (Fi360’s Senior Policy Analyst) and I have been doing research on retirement plan litigation over the past few months. We are uncovering some interesting observations and lessons from this analysis. Fi360 will be releasing a white paper on this subject soon to share our findings.

Rather than leave your readers without an immediate and substantive answer to your question, l will point to a recent study from the Center for Retirement Research at Boston College entitled “401(k) Lawsuits: What are the Causes and Consequences?”. This May 2018 study of over 400 plans found that the top three complaints were (1) inappropriate investment options, (2) excessive fees, and (3) self-dealing.

To me, the punch line from the Boston College study is captured in the observation that “From the courts’ perspective, fiduciaries’ main responsibility is to follow a prudent process in making plan-related decisions.” This points back to what I talked about earlier relating to the importance of Impartial Conduct Standards and Fi360’s Prudent Investment Practices.

FN: What’s the greatest litigation risk facing 401k plan sponsors and fiduciaries in general that no one is anticipating?
Aikin: Great question. I am struck by the fact that there is considerable inconsistency in findings across the court system. Frankly, some courts seem better versed than others about fiduciary obligations and important underpinnings of fiduciary law.

In our upcoming white paper about lessons from litigation, we will differentiate claims that tend to capture the court’s attention versus the ones that rarely gain traction when raised. But we also note that today’s best practices may be tomorrow’s generally accepted obligations. For example, the courts have not been receptive to complaints about having too many investment options (a common complaint in university retirement plan cases). With the growing body of compelling behavioral finance research, I would not be surprised to see courts become more receptive to complaints about poor plan design.

What the research tells me is that plan fiduciaries should always aim higher than the fuzzy line that divides compliant from non-compliant conduct. To this point, your readers may find a pair of white papers we did last year about the importance of reputation to advisors and to retirement plan sponsors of interest. Beyond just steering clear of litigation and compliance risks, by focusing on achieving fiduciary excellence, both advisors and sponsors can achieve substantial monetary and non-monetary benefits by establishing a great reputation.

FN: There’s been a popular push for ESG-based options in 401k investment menus. As you know, the research is slim and somewhat controversial as to whether ESG-based investing can be correlated to higher business profits and higher rates of return on the company’s stock. [Ed. Note: see “When Does ‘Socially Responsible’ Investing Violate Fiduciary Duty?, May 23, 2017)] This presents a bit of a quagmire for the fiduciary. At some point a fiduciary’s duty requires the fiduciary to tell someone “Stop! You might think you want this but it’s not in your best interest.” What should a fiduciary do if a client insists that the fiduciary undertake an activity that is not in the client’s best interest?
Aikin: This is really a two-part question. The first indirectly relates to fiduciary ramifications of ESG investing. The second asks directly what a fiduciary must do when directed by a client to act in a way that is not, in the advisor’s opinion, in the client’s best interest.

The answers to both questions are impacted by whether we are talking about ERISA or non-ERISA fiduciary obligations. Let’s focus first on the ERISA environment because the obligations are most rigid there.

DOL Interpretive Bulletin 2015-01 does a good job of addressing both questions in an ERISA setting. It states that “The fiduciary standards applicable to Economically Targeted Investments [DOL’s umbrella term that includes ESG investing] are no different than the standards applicable to plan investments generally.” Essentially, this means that the fiduciary must (1) act solely in the interest of plan participants and beneficiaries (2) with the care, skill, prudence, and diligence of a prudent expert, (3) incur only reasonable plan expenses, and (4) act in accordance with plan documents.

Can ERISA fiduciaries safely apply ESG factors in their investment decision-making? Absolutely. Guidance provided by the DOL under both the Obama and Trump administrations make clear that any factors, ESG included, that qualify as legitimate economic considerations “should be considered by a prudent fiduciary along with other relevant economic factors to evaluate the risk and return profiles of alternative investments.”

ERISA involves the “sole interest” standard that requires plan fiduciaries to focus on economic benefits in the context of the four obligations I listed above. If the client (the plan sponsor) directs the advisor to take an action that is not in the sole best interest of the participants and beneficiaries, the advisor does have to draw the line and say no.

Outside of the ERISA environment, things can be quite different. The advisor has a duty to follow lawful client instructions. For individuals and non-profits, consideration of non-economic benefits may be lawful and important. In such circumstances, these factors can and should be weighed in decision-making.

Advisors need to know the specific rules that apply to their clientele. They must also be guided by objective and competent analysis of the facts and circumstances that apply in any given situation. They should also avoid the temptation to substitute their own values and preferences for those of the client when legal or regulatory risks are not at issue.

FN: We’ve covered a lot here. We even ended on a deep philosophical note. Is there anything we missed that you wanted to add?
Aikin: We certainly have covered a great deal of ground. Let’s just close with my thanks to you for always covering the most important fiduciary issues of the day in such a thorough and thoughtful way. I always enjoy interacting with you.

FN: Well, gosh, Blaine, you’re making me blush. I also enjoy our little conversations, be they on the record or off. The fun, their enlightening, and they always leave me thinking just a little bit more. Thank you so much for taking the time to share with our readers your thoughts and insights.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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