The DOL Fiduciary Rule and Conflicts of Interest

The DOL’s recent fiduciary rule encourages us to think about conflicts of interest when serving our investment clients.

The Department of Labor’s fiduciary rule uses a term most of us have heard or used, but may not think of in terms of practice: Conflict of interest. Because the DOL rule was drafted to avoid investment conflicts of interest, this seems like a good time to talk about this term in the practical language of practice so that we can become more familiar with it.

A conflict of interest is first of all a conflict. Most of us have conflicts each day with service to clients and others. The majority of these conflicts can easily be resolved or ignored without distracting us from carrying out our responsibilities to those we serve. Either way, we can put them out of our thoughts in short order. These conflicts have no significant influence on the professional judgment we utilize to understand client situations and make pertinent financial recommendations to help them accomplish their financial objectives and goals.

Conflicts of interest have more influence than an ordinary conflict because they involve interests that are more important to us. They are more than a momentary distraction we can quickly address or simply ignore. Conflicts of interest are interests we highly value, such as close business relationships or other financial or personal interests.

They tend to be ongoing interests, and a conflict of interest can negatively influence our professional judgment. For this reason, the AMA code of ethics discourages physician service to family members, except in emergencies. So, avoiding a conflict of interest is done to avoid impaired professional judgment and subsequent service to a client.

Examples of conflicts of interests

An example of a conflict of interest is the change in a financial advisor’s relationship with a married couple when they divorce. Service before the divorce was provided to the couple with disclosure responsibility to both parties, as the interests of both parties were fully considered.

After the divorce, the interests of the two parties have differences, and one party may not want the other involved. If the prior client relationship with the couple when they were married was strong, the financial advisor may have significant difficulty in serving both parties as individuals without impaired judgment to one or the other. To resolve this potential impairment of judgment, the advisor may decide to refer one or both clients to another advisor.

Another example of a conflict of interest could be a financial advisor who has a business partner in an unrelated business. As the business provides benefits to the advisor’s income and net worth, the advisor may have a conflict of interest in also serving as the partner’s financial advisor.

Sound personal financial advice may conflict with the desire of the business partner regarding the business, and could affect the financial advisor’s income from the business. This could lead to impairment of the financial advisor’s professional judgment on behalf of the business partner.

To ensure quality professional judgment for clients, conflicts of interest should be avoided or remedied as soon as possible when they are recognized. Like other decisions a professional has to make, avoiding conflicts is not always easy, but it is the right thing to do. The professional credibility of the financial advisor may be at risk.

Frank C. Bearden, Ph.D., CLU, ChFC, is managing member at Ethics Consulting. Contact him at fbearden@outlook.com or at 210-724-1958.

By Joe Campanelli, RICP, LUTCF, REBC,