As the new administration continues to take shape, there is heightened uncertainty about the status of the much-anticipated Department of Labor fiduciary rule. Indeed, several people close to president-elect Donald Trump have suggested that the administration will roll back, delay or outright repeal the rule.
Altering the regulation in a meaningful way before the April 10 implementation deadline will be challenging, so advisors should continue to prepare. More importantly, regardless of the outcome of the rule, the industry is undoubtedly moving toward a fiduciary standard of care and holistic financial advice. Advisors who recognize this shift and structure their practices accordingly will find the most success.
The current DOL rule calls for the elimination of retirement investments that pay different levels of compensation, including commissions, since they can create an undue incentive for advisors to recommend one product over another. Yet before the rule was announced, investors who understood fees were expressing a preference for fee-based products, largely because of the clarity that these fees provide. As a result, even if the rule is repealed, the global shift towards fees should continue. Similarly, the industry is witnessing a move to lower-cost products as investors see more value in financial advice and portfolio construction than individual investments. Advisors need to address this evolving mentality regardless of the DOL rule’s fate. Those who take steps to build fiduciary relationships with their clients will prosper in the future.
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.