Financial advisors see the path ahead with the Department of Labor fiduciary rule as requiring some “elbow grease.”
A new report from Aite Group, DOL Fiduciary Rule: Survey on Financial Advisor Sentiment, focuses on the public debate that continues regarding the rule and on how financial advisors feel about the challenges they face as the rule becomes enforceable.
This report focuses on the responses of 152 financial advisors who service retail retirement accounts and state they are familiar with the impact of the fiduciary rule in relation to working with clients. The online survey was conducted from April to May 2017 and includes advisors from various financial firms, such as broker-dealers, banks and insurance firms, as well as independent RIAs.
“Although no doubt painful, the DOL fiduciary rule has furthered the fiduciary concept in the industry — to the industry’s benefit — when trust-building is critical,” Denise Valentine, Aite Group senior analyst, said in a statement, adding that “financial advisors see the path ahead requiring some elbow grease, but they are up for the challenge and optimistic.”
Aite Group asked respondents, many of whom have had many months of preparation, how difficult they think various tasks will be if the regulation proceeds as it stands today.
Most respondents agree as to where pain points exist — and here are three areas where advisors predict challenges.
1. Daily Routines
The greatest difficulties are found in daily routines, according to the survey, with 69% stating that accommodating workflow changes is either somewhat or very difficult.
“No one likes disruptions to routine, as the learning curve can create extra work, take focus away from client contact, or reduce timely actions,” the report states.
Sixty-six percent also believe that ongoing training for the implementation, which continues until Jan. 1, 2018, will be a challenge. Another pain point for 64% of advisors is documentation, which is key, not only on client paperwork and sign-offs but also on notes to validate decisions.
Technology can significantly support documentation; however, the survey finds that implementations of entirely new systems and modifications to existing systems can be difficult, according to 61% of respondents.
“Documentation and technology together go a long way to demonstrating best interest and proper due diligence on client recommendations and actions,” the report states.
2. Financial Advisor Compensation
Slightly more than half (54%) of financial advisors are finding compensation changes somewhat or very difficult, according to the survey.
“Product sales incentives are not viable in a fiduciary realm, and this is one difficult change for affected financial advisors,” the report states. The industry struggles to distinguish the financial advisor’s role as that of an investment consultant instead of a salesperson. Product incentives benefit the firm and the advisor but may not necessarily benefit the investor.
The report points out that traditional financial advisor compensation grids using tiered volumes may benefit the financial advisor but could create a conflict of interest regarding the client.
The regulatory focus on financial advisor compensation methods will call for new approaches. Currently, advisor compensation is gravitating to the fee-based advisory model.
“The best compensation approach will align the financial advisor with the client,” the report states. “Where investments are concerned, the flat fee model appears to do so. Overall, determining a reasonable rate is easier with greater fee transparency in the market, another goal of the fiduciary rule.”
The report believes that pricing structures will continue to evolve as the industry slowly moves to a holistic financial wellness approach that incorporates spending, saving, investing and insuring.
3. Client Data Collection
Another challenge for many advisors will be client data collection, according to the survey.
Much of client data is initially collected through suitability and financial planning questionnaires.
As part of the survey, Aite Group asked advisors if their client questionnaires changed relative to data collection and the types of questions asked.
Some financial advisors report the introduction of a questionnaire process — 22% said they introduced a investor suitability questionnaire, 18% said they introduced a goals-based financial planning questionnaire, and 16% introduced a financial planning questionnaire.
Many, though, have modified an existing questionnaire (41% to 44% across questionnaire types), and nearly an equal sum (34% to 38%) have made no change to their questionnaires.
The study finds that those with financial planning questionnaires experienced less disruption than did advisors using suitability questionnaires.
“Advisors doing fee-based business and those conducting investment planning services deliver a detailed financial plan involving greater due diligence on the client’s situation,” according to the report. “Those geared to the commission-based business often utilize an investor suitability questionnaire, which historically has been simple.”
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