When the U.S. Department of Labor issued its new fiduciary rule in early April 2016 requiring all financial advisors to provide conflict-free advice on client retirement accounts, officials touted it as a means to protect the average investor. That may be true, but it is equally true that the rule has the potential to disrupt and upend the business models that U.S. financial companies and advisors have depended on for years. This white paper provides context for the new rule, guidance for financial institutions’ response, and recommendations.
Once the rule kicks in next year, the business landscape will be starkly different from what advisors, annuity providers and financial firms are used to. Some industry players have made the drastic decision to exit rather than face the cost and potential risk of compliance. For advisors and firms, the key will be to provide individualized, client-specific advice— advice that is demonstrably in the client’s best interest. This will cause a tectonic shift in how advisors position products with their clients, which in turn has far-reaching implications for all stakeholders in the investment industry.
There is general agreement that the rule will cause a shift from commission-based to fee-based accounts, leading advisors to move their clients toward lower cost products and bring financial planning to the forefront of the advice process. This advice process will further need to be connected end-to-end, with recommended investment programs and products directly tying to the investor’s profiled financial needs.
At face value, as is the case with most market disruptions, there is an intense focus on new challenges and the potential downside associated with significant changes. However, the disruption can be positive. Firms that are forward-thinking and proactive can position themselves and their advisors as leaders in this new “best interest world”—if they take the right steps.
Those steps include changing product structures across both brokerage and managed product programs; adjusting the advisor payout grid and trailing compensation practices; implementing standards and processes around disclosures and client interactions; introducing robo-advisors and other digital technologies; and making many crucial improvements to technology platforms.
Success, however, will boil down to providing individualized, client-specific guidance that is clearly and demonstrably in the client’s best interest