DOL Rule in Flux, but Fiduciary Advice Inevitable

A major driver of the shift toward holistic financial advice is the emergence of new technology that facilitates better communication between advisors and investors. The most prominent example is financial planning software that is designed to better identify, through questionnaires and other resources, investors’ long-term goals. Once an advisor understands an investor’s retirement expectations, he or she can then build a strategic portfolio focused on achieving those objectives.

Complementing technologies enable portfolio construction that facilitates frank discussions between advisors and investors to uncover the investor’s true goals, and more aptly, their risk tolerance. In fact, advisors can now visually show investors — by meshing portfolios with historical data — the potential performance of a portfolio in a number of different market climates. This functionality is powerful in helping investors tie a dollar figure to possible risk and reward outcomes during market fluctuations, and what it will take to reach their goals. Improved reporting tools also enable advisors to continuously explain progress in practical terms, and evaluate potential adjustments with the investor. Such technology inherently creates a relationship conducive to holistic financial advice. As these tools grow in prominence, advisors who embrace their potential will put themselves in the best position to succeed. Regardless of the final outcome of the DOL rule, the regulatory climate is moving toward one that encourages a fiduciary standard of care and compensation that limits the possibility for conflicts of interest. Just this past April, the Securities Exchange Commission announced an upcoming share class initiative to assess certain commission products, and make recommendations for replacing them with share classes that do not charge investors 12b-1 fees. Other regulatory agencies, such as the Financial Industry Regulatory Authority, are also working to harmonize their rules and procedures with the current version of the DOL rule. As a result, many broker-dealers are already making permanent changes to their platforms.

While there is uncertainty about the future of the DOL rule, it is clear that the industry is moving toward holistic financial advice rooted in a fiduciary standard. Advisors who don’t recognize this shift and fail to adapt will find themselves dangerously behind the curve, potentially unable to keep up. Whether or not the DOL rule moves forward, advisors have an opportunity now to structure their business to fit the evolving paradigm and position themselves for growth.