The fiduciary rule proposal from the Department of Labor that’s been debated for months (years, really) isn’t perfect. But it’s frustrating to hear the industry argument that small investors and small business owners will lose out if the proposal is adopted. That claim doesn’t take into account the digital revolution happening in financial advice, nor does it acknowledge competitive forces that would chase any new client opportunities, regardless of size. When you examine the industry’s claim from the perspectives of technology and current broker-dealer practices, you’ll see that doomsday premise is blatantly false, and here’s why.
The issue of serving smaller clients and the retirement plans of small businesses comes down to two things: technology and business model. Numerous broker-dealer executives have argued their firm and advisors will not be able to serve smaller accounts if they are no longer able to be compensated through commissions.
Some firms impose a minimum of $100,000 or more on fee accounts because it is too costly for them to service small accounts on their fee platform.
This raises an interesting question. Is the proposed fiduciary rule the problem, or is there an issue with current business practices, infrastructure and technology among broker-dealers? I’d argue that it is the latter.
Those that are arguing against the proposed fiduciary proposal are fighting a battle that is already lost. Commission business, as a percentage of the overall independent broker-dealer space, is steadily shrinking. The fee-based and fee-only RIA segments of the market are the fastest growing sectors, according to Matt Lynch, managing partner at industry consulting firm Strategy & Resources.
Lynch says the industry needs to get on the same side of the table as the consumer, which means moving to a fiduciary standard. “Advisors want to do the right thing,” he says, “but the business model they operate under can sometimes prevent that from happening.”
Let it be known that I’m product agnostic and compensation agnostic. I believe advisors should be compensated for the advice they give; how that compensation is calculated is secondary. As for product, I’d argue that, for the little guy, easy-to-understand, low-cost and transparent products are the best.
Consider the argument that the little guy will lose access to advisors if the commission business is banned for retirement accounts. Would it really happen? Hardly. If the infrastructure at some firms makes it too expensive to accommodate smaller accounts on their fee platforms, other will.
It is highly doubtful firms serving smaller accounts would just allow them to fly out the door without a fight. More likely they would develop or purchase a new platform that could accommodate the business economically. If they fail to do so, their competitors will. If neither does enough to meet the new need, some disruptor from outside the industry certainly will.
What might that solution look like? I suspect it will look a lot like some of the digital advice platforms that are available now in the non-retirement space.
Vanguard offers a customized financial plan, ongoing portfolio management and more for 0.3% of AUM a year. Schwab Institutional Intelligent portfolios are available to Schwab advisors for fees of 0-10 basis points, leaving room for advisors to layer on their fee for advice.
Multiple other providers offer digital platforms for slightly more. Granted, some of the platforms are not highly evolved, but we are in the very early stages of a digital revolution. The platforms are getting more robust every day, and competition will keep prices for the technology platform competitive. Marry technology with the advice a competent advisor provides and you have a winning combination.
Some have interpreted the fiduciary rule to mean advisors will be prohibited from serving smaller plans. According to finance professor Ron Rhoades of Western Kentucky University, that is a misinterpretation. He states: “Fiduciary status is required to serve small plans. Either the adviser qualifies as a fiduciary by avoiding prohibited transactions (i.e., being fee-only), or the adviser (if additional compensation is received, which is a prohibited transaction) must adhere to the terms of BICE (aka the BIC exemption). Certainly, small plans will continue to be served.”
If the fiduciary rule is approved, the industry will surely require a transition period. In considering what’s likely to happen, the doomsday prophecies about the demise of the small retirement account market for advisors are incorrect.
Will it be disruptive to some business models? Certainly. Will it require innovation by financial institutions? Yes. On the other hand, change also creates opportunities. Those who embrace change and leverage technology to create more efficient systems will prevail (without having their margins crushed). Clients receiving advice likely value that advice, and will be happy to continue to pay for it.
The industry should be devoting efforts to building a better model and stop defending an antiquated one.
Joel Bruckenstein, a Financial Planning columnist, is co-creator of the Technology Tools for Today conference series and technology guides for advisors. For more information, visit JoelBruckenstein.com. Follow him on Twitter at @FinTechie.
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