As President Trump continues to wave his pen around all types of regulation, everyone in my circles is talking about what is going to happen to the DOL rule (because it’s clearly the most important issue facing America!)
Will the rule be overturned?
Will the rule be postponed so they can add some color to it?
Does President Trump even know what he signed last week?
The latest news stems from an executive order Trump signed on Friday, February 3rd, which was rumored to delay the fiduciary rule until the Republicans could kill it. There are differing opinions about what’s actually happening, but it appears that the rule hasn’t expressly been delayed quite yet.
One take is that the rule won’t be overturned because large industry players have already made sizeable investments in preparation for it.
For example:
Merrill Lynch eliminates commission IRA business in response to DOL rule
Ameriprise spends $11 million-plus this year on DOL fiduciary rule
This is certainly an indication that it will be hard to fully walk the DOL ruling back to the starting line.
But for now, the DOL rule’s applicability date remains: April 10, 2017. Could that change? Maybe. What do I think?
I actually don’t think it matters.
The Best Interest Economy is here to stay.
Why? Because after all the education that the Department of Labor, industry associations and firms themselves have done for the public, I can’t see clients accepting a return to not acting in their best interests.
So what are the central tenets of the Best Interest Economy? It has three core pillars.
Pillar Number One:
Fee Compression
In the Best Interest Economy, advisors will have to disclose fees to an indisputable degree of clarity, and fees must be “reasonable.”
The most interesting aspect of this discussion is that few are arguing that a 1% advisory fee is unreasonable. The focus has been on products that charge 5%, 6%, 7% commissions. Fee benchmarking tools will further drive this kind of clarity around what a “fair” cost of advice is.
But the real change in fees comes from the asset management side. The days of the 300+ basis point managed account programs are numbered, especially when that eats up 50-60% of the client’s average returns. ETF providers are leading the way with internal expenses going to single digits in the most extreme cases.
Where our industry delivers value, fees will continue to be justified, and it’s clear that real advisors who help their clients make great decisions, plan for the future and navigate complexity deliver value. That kind of advisor can continue to make healthy margins by adding scale and efficiency to their businesses.
Pillar Number Two:
Digital Platforms
Clients are already putting a lot of pressure on advisors to up their technology game. They want a wealth management experience like they get from their credit card company, their bank…and pretty much every other critical part of their lives. When clients have to transport themselves back to the nineties to check on their wealth, that’s clearly a problem.
The good news is that this is changing. Advisors are investing in technology. The onus is now on the technology companies to deliver excellent client-facing experiences so that all the spending doesn’t go to waste.
Here’s the best news: this is the solution to fee compression, and your clients are presenting it to you on a silver platter. An advisor’s most valuable asset is their time. The advisor is the product, and they only have so many hours to spend with clients. By delivering better client experiences and focusing their time where they actually deliver value, advisors gain substantial scale and efficiency, letting them bring on more clients while minimizing overhead. This is an advisor’s best weapon against fee compression.
Pillar Number Three:
Quantitative Methodology
I’ve heard the term “data is the new oil” countless times in the past five years. To put it another way, decisions without data are becoming a thing of the past.
Facebook won’t make a decision to change their algorithm or news feed without substantial testing data to back that decision up.
Employees that present data-less solutions at Uber’s corporate offices are asked to leave the room until they can return with numbers to support critical decisions.
Today, data has never been more accessible, and we have oceans of data to draw from to determine who our best clients are, how much risk they can handle, how to align them with the right amount of risk, and how to help them reach their goals.
How will you be able to prove that you are acting in a client’s best interests if you do not have the quantitative data to back it up?
Advisors that succeed in the Best Interest Economy will use a quantitative approach, not a subjective one.
Conclusion
No matter what happens to the DOL fiduciary rule, the three pillars of the best interest economy are here to stay. Be prepared.
Want to keep preparing for the Best Interest Economy? Here’s a download link to a checklist we’ve put together: Can a Fiduciary Manage 100+ Clients?
This post was revised February 6th, 2017 at 10:30am PST to reflect current events surrounding the Department of Labor.