4. The advisors must agree to maintain records that demonstrate their procedural prudence (the details of their decision-making process); and
5. The firms must monitor the advisors' activities on an ongoing basis.
Such procedures will enable firms to limit their liability to the conduct of the advisors and to their own oversight of those advisors. This way, a wirehouse, with its complex infrastructure of capital markets products and services, can fence off its fiduciary advisory services and reduce the potential that it will engage in prohibited transactions.
Naysayers will say that such safe harbor procedures can still be gamed-that client interests will not come first. This is true; however, firms and advisors who stretch the rules will be easy to spot and will be at risk of losing their safe harbor and facing litigation.
The safe-harbor procedures I have suggested are already similar to the ones being followed by Finra member firms and SEC-registered investment advisories. And they are business-neutral-no investment products or strategies are deemed to be imprudent. The test of prudence will depend on the advisor's decision-making process.
Lastly, these proposed safe-harbor procedures do not require congressional approval; they can easily be promulgated by regulators, and they do not require additional funding. The cost of compliance is borne by the firms seeking the protection of the safe harbor.
If we want to see a meaningful fiduciary standard defined for the industry, we need to define reasonable safe-harbor procedures that can insulate firms and advisors with the right intentions from falling victim to the unintended consequences of new regulation.
Donald B. Trone, GFS, is the founder and CEO/Chief Ethos Officer of 3ethos. He is the former director of the Institute for Leadership at the U.S. Coast Guard Academy, founder of the Foundation for Fiduciary Studies and the principal founder of fi360.