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Are You Ready for the Fiduciary Rule?

As announced this week by Secretary of Labor Alexander Acosta, the Department of Labor (DoL) Fiduciary Rule will be phased in from June 9, 2017 to January 1, 2018, despite a two-month delay initiated by the Trump administration. This date is fast approaching for financial professionals who find themselves embroiled in the new legislature.

The Fiduciary Rule expands the definition of a “fiduciary” in an investment advice role under the Employee Retirement Income Security Act of 1974 (ERISA). Going forward it will include all advisors who work with retirement plans or even provide retirement planning advice, binding them legally and ethically to meet the standards of the status.

Weighing in at over 1,000 pages of legal documentation, the rule will have sweeping effects across the financial advisory sector. But the impact will vary across different types of advisors. Many observers suggest that those who work on commissions, such as brokers and insurance agents, will be impacted most. 

Legislative context

The DoL’s ruling is aimed at stopping the $17 billion a year the government claims investors waste in excessive fees. The idea is that the new regulation will stop advisors from putting their own interests in earning high commissions and fees above their clients' interests in obtaining the best investments at the lowest prices, enforced through changes to client communication rules. The definition of fiduciary leaves no room for advisors to conceal any conflicts of interest.

As financial advisors grapple with the ever evolving complexities that develop from one of the largest legal changes to the industry since ERISA was first adopted, it becomes clear that among all the issues, the many challenges can be converged into a single question: how can advisory firms, asset and wealth managers continue to grow within this new landscape?

The two growth points to consider

1. New money growth: capturing money in motion (aka “financial mobility”) to grow your business.

2. Old money growth: retaining the assets that may soon fall under the Fiduciary Rule.

(To be clear, covered retirement plans under the DoL legislature include: defined-contribution plans, such as 401(k) and 403(b) plans; defined-benefit plans; and IRAs. For a fuller summary, please take a look here).

Dealing with these two aspects in order:

1. New money growth? Think about digital first.

There are three strategies to winning new customers in the era of the Fiduciary Rule: products, services and fees. Better products mean better client communication, in the form of better client portals and client reporting. Services remain crucial to differentiate advisors, regardless of technology. Fees – which are under massive pressure to reduce – will only be justified if products and services add value to investor clients. Advisors will need to have readily available comparison tools for all three in a digital advisor portal if they are going to successfully propose a portfolio on any retirement accounts. Better advisor portal solutions enable this.

The fiduciary ruling hands power to the investor, and with the financial mobility trends we are experiencing here in America, many of these emerging investors will be millennials, who are not only more savvy with their capital, but are far more digital and require better client communication.

This means you need to design an onboarding strategy that is both transparent and also digital-first for a younger generation. And you need to do it soon, given that by 2020 they will control more than half of all investable assets, or about $30 trillion, as a recent PwC report stated.

2. Old money growth? Think about digital first.

You can be sure that the existing assets you advise now fall under the new Fiduciary Rule, and advisors will need to adapt. Think about developing digital advisory capabilities and more advisory-fee-based offerings. And for risk mitigation, quickly determine how to substantiate that your advisory recommendations are in the best interests of clients.

There is an opportunity for advisors to (re)prove they are providing a fiduciary standard to clients. Is that you? At the moment, proving that responsibility is subjective – but if all financial advisory firms’ average fees are under 1% across the industry, anyone charging over that level will have a tough time evidencing that they’re fiduciary.

To be able to move customers to a fee-based model and then demonstrate value for those fees, you’ll need to differentiate. Advisors, asset and wealth managers, will soon need to convince their clients that their offerings of quarterly reports, rich research provided by the investment bank, and daily interactions are worth the fees.

The first upcoming compliance date of June 9, 2017 compels the financial advisor to prove the value of the fees it is charging. A digital strategy based around delivering rich and compelling content, personalized to the customer – i.e., a first-class client portal with first-class client reporting – will be table stakes.

Fortune favors the (digital) fiduciary

The fallout from the DoL bill is still emerging, but it is expected that the Fiduciary Rule will spur development and change across a myriad of financial areas. More notably is the technology platforms and applications that will aid independent broker-dealers in meeting their compliance challenges, or asset managers in providing portfolio strategies that are easily implemented across a variety of client types and meet the fiduciary standard.

InvestCloud’s goal is to help wealth and asset managers become digital: quickly, painlessly, effortlessly. Apart from the InvestCloud digital platform, we have a number of tools and methodologies to help you make that transition. Get in touch to know more. Or simply stay tuned.