You know a revolution is brewing in our industry precipitated by the U.S. Department of Labor’s fiduciary rule.
The efforts of many in the financial services industry to stop it have failed so far. Congress couldn’t override President Obama’s veto of legislation that would have killed the rule, so the opposition’s only remaining weapon is the handful of lawsuits it filed in federal courts. That might delay the rule, but it won’t stop it.
So, the only question facing you is: What are you going to do about it?
As with most revolutions, you can either join or be swept away.
As many as half of all advisors will leave the business over the next 10 years, in my estimation. The most likely? Commission-based sales reps who make a living pushing products such as non-traded REITs, oil and gas MLPs, cash-value life insurance and annuities of all sorts. Many of these products won’t survive the fiduciary standard, which will impact not only advisors who sell them but also the firms where the advisors are registered.
Many advisors who sell mutual funds with indirect compensation and revenue-sharing arrangements will leave, too. Some suspect that 12b-1 fees won’t meet the standard, so advisors who depend on them will find their revenue streams disrupted.
A big driver of the coming exodus is the L-word: lawsuits. If investors who feel they’ve been harmed are no longer restricted to filing an arbitration claim, entire firms will become subject to class-action lawsuits. (It’s one thing for a firm to defend itself against, say, a breakpoint violation. But what if a lawyer demands data from a firm about every client who ever bought the mutual fund in question?) In addition to the massive new financial exposure, advisors and firms face massive public exposure because, unlike arbitrations, lawsuits are public.
Speaking of publicity, the industry has already lost its fight, if not in the legal courts (yet), but in the court of public opinion. By filing its lawsuits, the industry has told the public that it doesn’t want to act in the best interest of consumers, but instead wants to continue selling the risky, high-commission, illiquid investments that produce fat profits for itself at the expense of hard-working Americans. Ironically, consumer animosity will result in increased regulation that the industry hopes to avoid.
Advisors who currently earn a living selling products that will be removed from the marketplace will be driven out because they won’t know how to sell what consumers really need and want: value. It’s easy to promise high returns, low risk and no fees (even when such claims are nebulous), especially when you never have to talk to that customer after you make a sale. But it takes substantial work to truly provide value to a client on an ongoing basis. And you’ll have to do all this without massive front-end commissions while incurring new costs for regulatory compliance. Many advisors—like I said, maybe half of them—will quit.
There is tremendous upside amid all this, however. With the exodus of bad players—those selling products to enrich themselves without regard to what’s best for clients—the remaining advisors and firms will be those striving to provide clients with the best advice and guidance.
This will improve the industry’s reputation, and as that happens, profits will rise. Thus, the rule will benefit all advisors and firms over time.
If the DOL rule makes you anxious, you should adopt the practices associated with the fiduciary standard or join a firm that already has. Or you can start now to find a new career.
The revolution is coming. I encourage you to join it.
Ric Edelman, chairman and CEO of Edelman Financial Services LLC, a registered investment advisor, is an investment advisor representative offering advisory services through EFS and is a registered representative and registered principal of, and offers securities through, EF Legacy Securities, LLC, an affiliated broker-dealer, member FINRA/SIPC. You can connect with him on LinkedIn or on Facebook at facebook.com/RicEdelman. Follow him on Twitter at @RicEdelman.