Financial advisors across the country are scrambling to comply with the Department of Labor’s (DOL) new fiduciary rule that requires avoiding all financial conflicts of interest when recommending retirement investments. While preparing for the rule is certainly the prudent course of action, advisors need to focus on more than compliance alone. Instead of looking at the rule as a distraction, they need to understand how the rule will fundamentally reshape the financial advising industry, and how it might require profound shifts to their businesses to remain competitive. Investors should also take notice and come to terms with how the rule will alter their relationships with advisors.
In April 2016, the DOL released the final version of its much-anticipated fiduciary rule, dramatically altering the financial advising landscape. Working under a heightened fiduciary standard, advisors can no longer recommend investment products in retirement accounts that provide them with different levels of compensation unless they or their firm enter into a best interest contract with their clients.
Yet, as advisors—along with their broker-dealers—continue to grapple with the changes and race to meet various specific requirements of the rule, they risk losing sight of the larger consequences and opportunities presented by the regulation. If advisors do nothing but abandon products that could generate a financial conflict, including commission-based investments, they will not prosper in the post-DOL-rule world.
Adjusting and thriving under this regulation demands that advisors take a broader perspective by restructuring their businesses for long-term success and thinking critically about how to communicate their changing relationships with investors. For those advisors who decide to move to a pure fee-based model, this means developing a comprehensive plan for transferring clients from their commission solutions to fee-based products, including a timeline of when to move each investor and how to proactively explain the reasoning for this change. It also requires assessing how shifting to fee-based products will change their ideal client target, necessitate a realigning of their service model, alter revenue per client, and then adjusting their business model based on that information. These are not easy tasks, especially when you consider that advisors must achieve all of this before the first implementation date of April 10, 2017, and definitely by the full implementation date of January 1, 2018.
This is a very rapid timeline for large business changes. Many advisors are worried about spending so much energy realigning their business model at a time when their clients need help understanding complex markets and meeting financial goals. Advisors also worry that they may need to leave small clients behind who will be more difficult to serve in the post-DOL world.
While compliance may feel like a needless distraction given these concerns, advisors must recognize that preparing for the rule and ensuring the health of their businesses post-implementation is critical to serving their investors over the long term. When beginning the preparation process, advisors should start with their value proposition. Reasserting the unique value they bring to investors and cementing a relationship based on holistic financial advice is vital. As they explain to clients that they are shifting to fee-based products, which may cost investors more, advisors should proactively take the opportunity to emphasize the enhanced services they expect to offer. In addition, as advisors restructure their business models and take a close look at their client roster, they need to take the time to identify their target clients and build a business model based on reaching those people. This comprehensive approach to the pending fiduciary environment is not a distraction—it will help advisors go beyond mere compliance and empower them to thrive.
The DOL rule will profoundly change the financial advising landscape when it takes effect in April 2017. There are a number of resources and tools available to assist advisors as they navigate a path to compliance, and a good place to start is by evaluating overall preparedness. Yet while compliance is important, it’s not enough. Advisors need to be prepared to restructure their business and strengthen their relationships with clients so that they can prosper in the long term.
Natalie Wolfsen is the chief commercialization officer at AssetMark Inc.