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Three Ways to Make Financial Reform Work for You

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The financial reform bill has been an unusually contentious piece of legislation, inspiring strong emotions on both sides. Whether it is really good for the financial health of Wall Street and Main Street remains to be seen. But, like it or not, it’s now a reality.

So, it’s up to advisors to reposition their businesses to derive maximum benefit and minimum harm from the new legislation. After all, Wall Streeters have always been a practical, adaptable bunch. As the saying goes, “Don’t Fight the Tape.”.

Here are some positive ways in which advisors can respond to the inevitable industry changes ahead:

1) Recognize How the Retail Side of the Business Will Grow in Importance

The retail business is likely to become more important to the bottom line as firms pare back on profit centers that the financial overhaul has targeted – proprietary trading, credit-card business, and trading in derivatives and other esoteric products.

In a July 16 conference call, Bank of America projected that the bill overall would cost it $4 billion in annual revenues. Barclays Capital estimates $19 billion in industry wide costs.

In response, wirehouses will refocus on their core, Steady-Eddie wealth-management franchises. For advisors, this means more resources to deepen and expand advisor platforms.

I would therefore expect firms to compete to develop unique and complex offerings that will encourage their salesforce members to remain with the firm rather than opt to go independent.

With that, firms will selectively re-build their home office product specialist marketing teams that had been slashed after the 2008 market meltdown. Once retention awards expire, the firms will likely introduce a new generation of deferred compensation programs.

2) View This as a Chance to Showcase Your Investment Process

The financial overhaul is headed toward mandating a fiduciary standard, which major brokerage firms had fought but could turn out to be a positive development for the industry.

As fiduciaries, advisors will be held to a higher standard, always keeping the clients’ best interests first and foremost.

Fiduciaries are expected to have an ongoing, prudent process in place that informs their actions. They will be held responsible for deficiencies in their process, not necessarily for sub-par results, i.e., poor investment performance.

For a savvy advisor, this becomes an opportunity to deepen client relationships by showcasing their investment decision-making process.

Advisors can demonstrate their unique value to clients by first helping them construct a road map to achieve their goals. Then, they can show them how the investment recommendations are in accordance with the mutually agreed upon plan. Many good advisors are doing this already.

3) Use Financial Reform as an Opportunity to Bullet Proof Your Compliance Process

Financial reform will probably require the advisor to document more formally the investment decision making process and obtain the client’s acceptance. This may include investment policy statements as well as documentation that recommendations were not merely “suitable” but in fact consistent with client objectives and in their best interest.

The increased paper trail can go a long way toward shielding advisors from tomorrow’s lawsuit. It won’t be quite a bullet-proof vest, but it will be as good as it can get.

President Obama says that “These reforms represent the strongest consumer financial protections in history.” Opponents describe the bill as 2,300 pages of vagaries and sloppy thinking. One congressman opines that the bill “probably has at least three unintended consequences per page.”

Who is right? We’ll all find out in due time.

Meanwhile, it’s incumbent upon advisors to be flexible and adaptive in order to reposition themselves to benefit from the new realities.

As they say on Wall Street, “The trend is your friend.”


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