Most coverage of the Department of Labor’s (DOL) fiduciary rule has focused on the challenges it will introduce for firms, such as increased costs, compliance and margin pressure. However, as we all know, within any challenge there lies opportunity.
With today’s new challenge, industry leaders will take the opportunity to go beyond the basics of the DOL rule and will embrace the spirit of the rule to become truly client-centric. Beyond just avoiding conflicts, the spirit of the new rule encourages advisors to put their clients‘ best interests ahead of all other factors when providing investment advice on retirement accounts.
Practically speaking, many expect the rule to accelerate the industry’s ongoing transition from commission to fee-based advice in these situations. I believe the spirit of the new rule will also accelerate a bigger long-term trend in our industry — the move from a product-centric to a client-centric way of doing business. Those who embrace this spirit of the DOL rule can use it as a catalyst to transform their firms and differentiate themselves from their peers.
By being truly client-centric, I mean incorporating the following elements into providing advice to each and every investor, large and small:
Crafting portfolios specific to each client, truly reflecting their unique profile.
Some advisors can only afford to personalize a portfolio for their largest clients, while everyone else gets somewhat mass-produced solutions. However, with the right planning and operational and technical infrastructure in place, creating customized portfolios for each client can be done at scale.
Helping clients achieve their life goals, instead of simply chasing performance.
The traditional approach to designing and measuring portfolios against a benchmark is changing.With many industry leaders embracing goals-based wealth management, portfolios are increasingly being designed and measured around each investors’ unique goals for their wealth.
Managing an entire household’s wealth as an interconnected whole.
Many advisors are used to managing a client’s wealth account by account. Even if an advisor wants to take a holistic approach to providing advice across a household’s entire wealth, often the best they can do is household level reporting. But ideally they should go beyond just reporting and manage all of their clients’ accounts as a whole, guided by a single overall investment strategy.
Optimizing portfolios to capture tax alpha.
Rather than trying to pursue alpha through traditional benchmark-oriented investing, a client-centric advisor can demonstrate a more predictable source of alpha to their clients by making the most of tax management. This starts with considering the unique tax profile of each client account and includes the regular, ongoing application of sophisticated tax management practices such as tax lot selection, proactive tax loss harvesting, short-term gain deferral, and asset location. And it is only through the holistic, household portfolios I mentioned above that you can achieve asset location, the optimal placement of securities in taxable vs. tax-advantaged accounts based on each security’s tax efficiency.
Offering interactive tools to let clients interact with their wealth the way they want to.
The rise of digital wealth services has democratized wealth management, challenging the value proposition of traditional advisors. Your clients have new expectations in today’s digital world; they want a hybrid of human touch with digital access. We live in an anytime, anywhere world and a client-centric advisor interacts where and when their clients want to.
How to be more client-centric
While I do not expect anyone to transform their business to this extent overnight, the DOL rule is already pushing many firms to make major changes within the next year. So this could be the right time to begin putting some of these elements into practice, or at the least lay the foundation for a long-term implementation roadmap. For example, you could begin going beyond benchmark-oriented performance reports and also show progress against your clients’ goals. Or you could begin putting one or more tax management techniques into a regular, ongoing practice to achieve tax alpha.
While some firms may see the new DOL rule as a big disruption and challenge, I encourage you to see this as an opportunity to transform your practice, differentiate yourself from your competition, and give your investors what they truly want and need — advice that puts them first.
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