On the heels of the surprising outcome of the presidential election, the financial services industry has entered a period of uncertainty when it comes to one of the most sweeping regulatory changes in a generation.
The Department of Labor’s fiduciary rule is on the doorstep of being implemented in a few short months. However, there are very real rumblings from the Republican party that its leaders are gearing up to take down just about every facet of the Obama administration that they can, including the DOL rule.
(Read Melanie Waddell’s analysis of the rule’s chances of survival under Trump and a GOP-controlled Congress.)
Regardless of your political leanings, and whether you are pro- or anti-DOL rule, this political movement has created doubt in the industry over whether to continue investing in the technology necessary to comply with a best interest standard.
On the one hand, the cost of new systems, technology upgrades and staff training can easily run into the millions of dollars for broker-dealer and RIA firms, which steps that may ultimately not be required by law, despite the many benefits that deploying the latest technologies brings.
On the other hand, if the Republicans fail to repeal the rule, are you willing to risk the costs, fines and potential liabilities for non-compliance that are sure to come?
Right now, I would say that the betting odds are roughly 4-1 that the rule will become law by the April 2017 deadline.
The reasons the odds are vastly in favor of it going through are the tremendous obstacles in a very short period of time that would have to be overcome in order to repeal it. These include the fact that it will take an act of Congress to overturn it, something that even on a fast track can take a year or more.
Additionally, the Democrats are not dead yet and have some formidable proponents that can filibuster any movement to repeal. It’s also true that the DOL rule will most likely not be the administration’s top priority – Obamacare, Dodd-Frank and immigration will attract most of its attention in the next couple of years.
Ultimately, the biggest wildcard is Donald Trump himself. Will he abandon his campaign promises to protect Americans and their retirement savings from ‘evil’ Wall Street or go along with the party whose leaders abandoned him during the election to repeal a pro-investor rule?
Counteracting these factors is the early momentum in the House to move quickly against the rule along with the potential that the new Secretary of Labor, who has yet to be appointed, may delay or attempt to modify it as well. These contra-forces are creating an unprecedented period where we won’t know until we know.
Use Technology to Smooth Regulatory Risk
So how should advisors and their partners behave during this period of uncertainty? I believe it all comes down to the fact that regardless of whether the DOL fiduciary rule or any other regulatory change requires financial professionals to do so, following a best interest standard is just plain good business.
How can anyone argue that doing the right thing for the client is a bad idea? The financial services industry already suffers from a personality problem and is consistently ranked at the bottom of the heap for trustworthiness. If anything, the industry should embrace this concept and move forward to quickly flip the script.
Case in point: Merrill Lynch. Merrill has announced sweeping changes to remove conflicted commissions from retirement accounts and is embracing a fiduciary standard in a new marketing campaign. Even if the DOL fiduciary rule is repealed, Merrill will enjoy a tremendous competitive advantage with that positioning. Other major players such as JPMorgan and Commonwealth Financial are doing the same, playing the long game, which will pay off down the road, regardless of political developments.
Other macro trends affecting advisors include technology disruption in an industry that is still paper-based and manual-process dependent. Automation is finally entering wealth management, a movement that once here will not go away.
Now more than ever, the industry needs to invest heavily in technology to bring the client experience up to what today’s consumer is used to: the ability to get it now on their mobile devices at the swipe or touch of a finger.
By upgrading their systems and embracing automation to comply with a best interest standard, firms will have a flexible infrastructure that can evolve and support the business models of the future currently being shaped by technology.
If there’s one thing we know to be true, it’s that change is a constant. Anyone using the uncertainty principal to delay technology investments is playing a dangerous and shortsighted game – just go ahead and ask the taxi drivers, travel agents, book sellers, music stores, video rental operators and classified ad salespeople for their thoughts.
In the meantime, grab the popcorn – this movie is going to be fun to watch!
— Read Forget Robos; Regulations Now Top Driver of Advisor Tech on ThinkAdvisor’s TechCenter.