It’s getting to be crunch time for advisors to ensure compliance with the Department of Labor’s fiduciary rule. By April 10, 2017, advisory firms must adhere to what the DOL describes as “impartial conduct standards,” acting in the best interests of the client.
They’ll need to notify all retirement investors of their fiduciary status, describe any material conflicts of interest, and designate someone to be responsible for addressing material conflicts of interest and monitoring adherence to the new rule. Exemptions from best interest standards will be available through the use of the Best interest Contract Exemption (BICE) or principal transaction exemptions, and can be phased in up until Jan. 1, 2018, when full compliance is required.
Matt Matrisian, senior vice president of Strategic Initiatives at AssetMark, which provides investment, relationship and practice management solutions for advisors, has developed a list of questions for advisors to see how prepared they actually are for the new rule:
Are you still unclear about the details of the final DOL rule and the responsibilities of becoming a fiduciary?
Is the majority of your book of business in retirement assets?
Are the majority of the products you offer commission-based?
Are you receiving any non-level compensation?
Are you still waiting to speak to your clients about the rule?
Have you segmented your book of business?
Are you lacking a formalized compliance and documentation process to comply with the final rule?
Are the majority of your commission-based assets in products that would require a surrender charge or are difficult to transition?
Are the majority of your commission-based mutual funds in direct business that is difficult to supervise under the fiduciary standard?
If an advisor answers “yes” to five or more of these questions, he or she should “begin preparing immediately,” according to Matrisian.
Matrisian suggested a few places advisors can start:
1. Segment Clients and Revenue Streams
The key question to answer here is whether a commission-based client has enough assets for the advisor to move that client to a fee-based structure, which Matrisian said can be good for business.
Not only does such a structure increase fees as assets grow, but “there’s less regulatory onus and a better business model with recurring revenue and higher valuations as a result,” said Matrisian. “It’s important for advisors to move to fee-based relationships when appropriate.”
2. Switch Investments to Lower-Cost Equivalents
Matrisian recommends that advisors move client accounts away from higher-fee mutual funds, such as A, B or C shares, which have loads or trailing fees, to cheaper institutional shares (which have larger minimums but lower expenses) when possible, and from commission-based annuities to fee-based annuities.
“Usually what we see in a lot of advisors’ businesses is one or two commission situations, including annuities,” said Matrisian. He expects more product managers will be consolidating the number of funds and other products and introducing lower-fee products as a result of the DOL rule.
In addition, advisors may be able to aggregate enough client assets to meet the minimum requirements for institutional classes of funds.
Edward Jones, for example, will no longer be selling retirement savers mutual funds outside of an advisory account, which will carry an annual fee, and it is lowering the minimum for those advisory accounts.
3. Focus on Your Value Proposition
The shift away from higher-cost commission-based products to a fee-based relationship will be a challenge for a large number of advisors who will then have to differentiate themselves in the marketplace beyond any investment prowess, said Matrisian.
“Such a large segment [of advisors] were product-oriented brokers who hung their hat on their investment management expertise,” said Matrisian. “But that is becoming more and more of a commodity, so advisors will have to make that shift to define and change their value proposition.”
Advisors will have to offer clients expertise in budgeting, financial planning and estate planning, which many do now on an ad hoc basis, according to Matrisian. “It’s important for advisors to define what their service model is and reorient it around that value proposal.”
To that end, Matrisian suggested advisors adopt a goals-based approach, which doesn’t necessarily have to use so-called holistic financial planning, but still represents a shift in the conversation. He expects more advisors will focus on such goals and planning and outsource investment management to companies like AssetMark.
4. Consider Adding Credentials
Advisors should also consider qualifying for additional certification such as a CFP or ChFC as part of a new value proposition to further differentiate themselves from the traditional commissioned broker model.
“Having more planning-based credentials in the marketplace will be extremely valuable for advisors going forward,” said Matrisian. “If you’re an investment planning specialist investing in passive ETFs, you’re done.
“Think about the overall value proposition,” he continued. “Then see which commission-based products can be shifted to a fee-based account.”
If clients don’t have enough assets to qualify for a fee-based account, Matrisian suggested advisors consider charging those clients an hourly planning fee once a year.
“Sit down with those clients, tell them you’re shifting to a smaller customer base, and if they don’t meet your new minimum asset requirement, then offer [to] charge them an hourly planning fee, for maybe $250, and meet once a year. Set the context for the clients, which puts the decision back to them. I’m not a big fan of firing a client […] unless they’re very difficult or cancerous to the business.”
5. Say Goodbye to Your Old Business Model
The DOL fiduciary rule will force advisors “to adjust their business models dramatically in the new world if it’s going to be sustainable,” said Matrisian. Advisors will “need to think more like a business owner who wants to make the same amount of money [or more] but with fewer margins and they will have to be thoughtful about scaling their practice in a way that allows them to do that.”
Technology can help, making it easier to handle more clients paying less in order to retain a comparable level of earnings, said Matrisian. In the end, he also expects more consolidation in the marketplace.
AssetMark is in the process of developing its own readiness assessment microsite for advisors to assess how well they’re prepared for the DOL rule.
— Read DOL Fiduciary: Outsourcing Offers Small Firms a Lifeboat on ThinkAdvisor.