A lot has happened since Riskalyze's VP of Partnerships, Kyle Van Pelt, wrote about the Department of Labor's Fiduciary Rule and the new "Best Interest Economy."
Applicability date delayed until Jan 2018.
Rule partially in effect June 2017.
Nevermind...DOL Fiduciary Rule full implementation delayed until July 2019.
Fifth Circuit Court rejects rule as DOL "overstepping authority."
DOL (essentially) dead.
Wait! Appeals Court in the Tenth Circuit upholds rule.
The DOL's Fiduciary Rule has become the Schrödinger's Cat of the regulatory landscape. One thing remains constant: firms all over the country have invested significant time and resources into enforcing the rule, and the rule is still partially in effect. Walking away from this genie isn't really an option.
The SEC is working on its own fiduciary rule that could apply to all accounts, not just retirement accounts, which would provide a fiduciary standard across the industry. It wouldn't be out of the question to assume that the SEC benefitted from witnessing the opposition the DOL FR received. Could we finally have a rule that isn't 1000 pages long with an FAQ that requires its own FAQ?
Even though the DOL FR is mostly dead, our opinion remains unchanged: the Best Interest Economy is here to stay. A recent article from MarketWatch detailed three ways in which the DOL's fiduciary rule has already changed the industry and the public's perception of it:
Many companies decided not to fight the new rule and started bragging in their advertising that they put their customers’ interests first. Several brokerage firms eliminated front-end commissions in favor of an annual asset charge, and dozens of companies created a class of generally less costly mutual fund shares.
Several states have taken up the cause. Massachusetts is actively pursuing efforts to protect retirees; Nevada has passed its own fiduciary rule; and Connecticut, New York, Maryland, and New Jersey have fiduciary rule proposals on the table.
Consumers have been put on notice: The battle against the fiduciary rule confirms that many companies put their customers “second.” Consumers now know that they should be cautious when dealing with financial advisers and feel free to ask directly if their interests come first.
Articles like this highlight what is at stake in the fiduciary rule debate: client trust. For all of the DOL FR's obvious faults, myriad exceptions, and major gaps, it established fiduciaries as not just a standard but the gold standard in the eyes of investors.
States have stepped in to pick up the regulatory slack as the fiduciary rule floundered in the courts, but we don't believe that investors benefit from patchwork rules. Should residents of Nevada, Massachusetts, and Maryland be the only ones to expect a fiduciary, for example? Ultimately, it will be up to the SEC to enact an industry-wide fiduciary rule that applies to all accounts.
The three core pillars of the Best Interest Economy remain unchanged:
Pillar Number One:
In the Best Interest Economy, advisors will have to disclose fees to an indisputable degree of clarity, and fees must be “reasonable.”
The most interesting aspect of this discussion is that few are arguing that a 1% advisory fee is unreasonable. The focus has been on products that charge 5%, 6%, 7% commissions. Fee benchmarking tools will further drive this kind of clarity around what a “fair” cost of advice is.
But the real change in fees comes from the asset management side. The days of the 300+ basis point managed account programs are numbered, especially when that eats up 50-60% of the client’s average returns. ETF providers are leading the way with internal expenses going to single digits in the most extreme cases.
Where our industry delivers value, fees will continue to be justified, and it’s clear that real advisors who help their clients make great decisions, plan for the future, and navigate complexity deliver value. That kind of advisor can continue to make healthy margins by adding scale and efficiency to their business.
Pillar Number Two:
Clients are already putting a lot of pressure on advisors to up their technology game. They want a wealth management experience like they get from their credit card company, their bank...and pretty much every other critical part of their lives. When clients have to transport themselves back to the nineties to check on their wealth, that's clearly a problem.
The good news is that this is changing. Advisors are investing in technology. The onus is now on the technology companies to deliver excellent client-facing experiences so that all the spending doesn’t go to waste.
Here's the best news: this is the solution to fee compression, and your clients are presenting it to you on a silver platter. An advisor’s most valuable asset is their time. The advisor is the product, and they only have so many hours to spend with clients. By delivering better client experiences and focusing their time where they actually deliver value, advisors gain substantial scale and efficiency, letting them bring on more clients while minimizing overhead. This is an advisor's best weapon against fee compression.
Pillar Number Three:
We've heard the term “data is the new oil” countless times in the past five years. To put it another way, decisions without data are becoming a thing of the past.
Facebook won't make a decision to change their algorithm or news feed without substantial testing data to back that decision up.
Employees that present data-less solutions at Uber's corporate offices are asked to leave the room until they can return with numbers to support critical decisions.
Today, data has never been more accessible, and we have oceans of data to draw from to determine who our best clients are, how much risk they can handle, how to align them with the right amount of risk, and how to help them reach their goals.
How will you be able to prove that you are acting in a client’s best interests if you do not have the quantitative data to back it up?
Advisors that succeed in the Best Interest Economy will use a quantitative approach, not a subjective one.
What happens to the DOL's Fiduciary Rule no longer matters. The cat's already out of the bag. (Or is it in the bag?)
See what Riskalyze CEO Aaron Klein has to say about what's next for the Best Interest Economy.
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