Asset managers and advisers have been equally affected by the coming Department of Labor fiduciary rule and the advent of digital advice.

Some asset managers have been quick to respond, acquiring robo advice platforms to develop new distribution channels and also recalibrating products for fiduciary advice.

The challenges presented by these trends will continue to require managers to adapt, but the obstacles are not insurmountable, says NAPFA Chairman Tim Kober.

"It's not so much all about the products anymore because the rule is going to create a funnel that potential product recommendations will have to fit through," Kober says.

"A lot of NAPFA members came from that sales culture background and for varying reasons, self-selected to make that shift without an external forcing function, so there's plenty of objective evidence that it's possible."

Kober and NAPFA CEO Geof Brown addressed the changes being brought to the financial industry by the rule and the impact of robo advice in a conversation with Money Management Executive.

This is an edited version of the conversation.

As an organization and personally, were you satisfied with the ultimate fiduciary rule from the DoL?

Brown: From my NAPFA hat, I think it's extremely validating thinking about the last 30 years of what the fee-only community has been advocating in terms of how advice should be delivered to consumers.

That's not to say that NAPFA members won't have challenges in adapting to the implementation of the rule. It's not just going to be business as usual for everyone. There's going to be some compliance hurdles, there's going to be some due diligence changes that have to be a part of the process for them and that's to be expected.

We didn't expect the rule to come on and it just say; "Now I have this fiduciary rule and if you're a fee-only adviser you just continue what you're doing."

When you look at the broader industry, there's a little cottage industry that's popping up that says, "Let me re-tool myself where the product or service that I'm providing to the advice community to make sure it helps them comply with some of the tenants of the DoL rule."

When you look at it from a political perspective, the pragmatist in me would like to think that all of the work, all of the rallying, that we did to help the department get this rule propagated and on the trajectory to implementation that it doesn't get unbound from the courts or from a legislative perspective.

Has there been any sort of peer discussion from advisers about whether or not they will be able to maintain a successful career?

Brown: The basic premise of the Financial Planning Coalition's comment letters and support for the rule is that we had a diverse group.

We had fee-only advisers, we had registered reps, we had insurance salesman, so we ran the gamut of compensation model and the fact that we were able to advocate for a rule that is essentially bringing a best interest standard to the entire industry showed that we were prepared to have those conversations in that it was something that was workable across businesses.

I think when you get down to the peer level, our audience is very homogeneous. We had to get over a hurdle internally in that some advisers felt like it was calling into question the fact that they were fiduciaries; that's because they had to change some of the things that they were doing to comply with the rule, and that there was something wrong or adverse about what was happening before it came into place.

Kober: It's not a behavior or culture change, but more of a procedure change, where some of the other constituencies have pretty significant training competency moving from a sales culture to a fiduciary culture, and that's a big lift.

Morningstar senior equity analyst Michael Wong did that research and personally I think he did Yeoman's work. That along with his description of the landscape, the changes that were going to take place in comparison with the U.K., as well as the changes in Australia; it's all pretty much going to that script. I've seen it come across my inbox predicting the ... attrition of so-called advisers that are really sales people that see the writing on the wall and are now looking for a different job. That's not surprising.

Different players, depending on whether they're in the insurance product business or broker-dealers and proprietary mutual funds, are moving in predictable ways according to the script. In that sense it's all somewhat predictable and not surprising. If you game that out over the long term, it's very much in the best interest of consumers, and so if you view it in that lens it's all highly beneficial.

Is it the responsibility of the adviser that's already been a fiduciary to reach out to colleagues that feel conflicted?

Brown: I think it's probably a little bit of both. I think in the context of the membership associations that exist within the field, you'll see that exchange of ideas that coaching, if you will, take place.

When you get to the place where you're competing for business or having a conversation with a consumer that's making a consideration between two different advisers - one who existed under a fiduciary standard for years and one that is new to the scene - it is definitely a point of differentiation that, I wouldn't say you should exploit, but it is one thing that you should capitalize on.

Kober: In one sense this is validation of NAPFA's long-term position and approach, and for a long time we were a lonely voice in the wilderness. Now as a result of the rule, the paradigm and business model that NAPFA members have operated under is now becoming much more mainstream. That's good for our members and good for consumers as well.

Having said that, and as a career changer myself, I found that the culture of NAPFA as a membership organization is incredibly accommodating and most NAPFA members operate from an abundance mentality. Once you demonstrated commitment to operate under those principles, people are incredible willing to share their best practices and help you out to be successful, and I think that's going to continue.

Is it safe to say there is an eat what you kill mentality among advisers that have already operated as fiduciaries?

Kober: I think Wong phrased it eloquently when he looked at that shift. He talked about flipping the value chain from a product centric paradigm. And when you have a product centric paradigm then you have a sales culture to support that.

What the rule is inevitably going to do in the long term is flip that and now make advice primary and the products secondary, so it's not so much all about the products anymore because the rule is going to create a funnel that potential product recommendations will have to fit through in order to pass the, "this is in your best interest" criteria. It's going to narrow the scope of eligible products and make that less of a differentiator and therefore wizening the importance of the advice component, which is again shifting from a product sales culture more to, "I'm here to advise you as a client."

That's a big shift. It's not insurmountable, but a lot of NAPFA members came from that sales culture background and, for varying reasons, self-selected to make that shift without an external forcing function. So there's plenty of objective evidence that it's possible.

In terms of the robos, how would you sum up how advisers have been impacted at this point?

Kober: If your position in the marketplace is that you're a money manager, in that you deliver alpha to your clients and you measure yourself on your investment returns, that combination of the fiduciary rule plus robo advice is a threat to your business.

From the perspective of someone like a NAPFA member whose value is anchored on a deep long-lasting relationship with the client, and a value proposition based on comprehensive planning, this is a good thing. As soon as the digital technology evolves to the point where I am able to outsource and feel comfortable about where I can replicate the capability that I'm delivering now in a labor intensive way, I'll be right there handing that over because it's not the place where I feel like I'm delivering the most value to clients.

Did NAPFA ever consider that not everybody in the fiduciary coalition, especially the robos, had advisory interests at heart in supporting this rule?

Brown: I think that was definitely a consideration, but one of the things we kept hearing from the opposition was that small-to-medium-size investors would be hurt by the rule. We knew there would be some backfill by some digital advice component where some advisers may not even be able to meet.

While we have a strong contingent of NAPFA members and other financial planners that do serve that segment, the digital component could potentially help meet that gap. It's one of those things. We looked at that entire process as how can we get a step in the right direction as consumers, and we got that.

Can robos act as fiduciaries?

Kober: The principle of being a fiduciary, if you look at it in a broad context, it's very difficult to act as a fiduciary. If you put aside the fiduciary part, it's developing a comprehensive holistic understanding of my client and their situation and their needs.

The case study example that I think proves this point is: "I am some high-tech employee and I'm working at High-tech Company X and they've got a robo platform on their 401(k)." And he goes and answers the 20 questions and they pick an asset allocation for him. But what might be the case is the two most important things for that person and their family's life right now is signing up for lots of term-life insurance and getting their cash flows straight. It's hard to understand how the digital advice as currently envisioned can broaden the scale to ask all of the right questions to understand the infinite variations of client circumstances, because their spouse may or may not have that situation covered, for instance. That's where the human interaction that can probe and go in any path comes in.

It's difficult to deliver comprehensive planning relationships through a virtual digital advice platform today. That's why I am going with the comprehensive financial planning versus the fiduciary.

Within the narrowly defined construct of advising on my 401(k), but that may or may not be the most important action that that person needs to take right now to ensure that their overall financial health, or mitigate the biggest risk that they have right now.

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