No turning back the clock on fiduciary
Is it too late to overturn the fiduciary rule?
That question might seem far-fetched in the wake of President Trump's memorandum, instructing the Department of Labor to review the regulation once again with an eye toward killing it or aggressively scaling it back.
But the environment has changed over the past year. Ameriprise spent tens of millions of dollars and assigned more than 500 people to oversee compliance. Betterment and Merrill Lynch invested in advertising campaigns to broadcast their embrace of it. The regulation even penetrated pop culture; comedian John Oliver dedicated an episode of his weekly HBO show last year to its benefits.
And just as the president has moved to delay the rule's implementation, more clients are now asking for lower fees, greater transparency and a higher standard of care. And fiduciary advocates have been strategizing on how to continue to the push for higher standards of client care.
"Regardless of whether the rule goes into effect, we will be operating in the fiduciary era," says Valerie Brown, chairwoman of Advisor Group, which recently rolled out platform changes for its 5,000 advisers.
Since it was unveiled last year, the Labor Department's regulation prompted an industrywide reevaluation of business strategy that looks unlikely to abate.
"For our firm, we have spent untold numbers of hours and dollars to get ready for this rule," Brown says.
'THE BIGGER ISSUE'
As a result of President Trump's memo, the Labor Department will review the rule and possibly issue a new one. It's currently not clear what may replace the regulation as a result.
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But regardless of what happens in Washington, every executive contacted by Financial Planning before and after Trump's action said that they would keep many, if not all, the changes they've been implementing. Firms have been lowering fees, increasing transparency and making multimillion dollar investments in revamped platforms and new technologies, chiefly around communications and supervision.
"The bigger issue for us is that there are macro trends requiring a transformation,” says Adam Antoniades, president of Cetera Financial Group. “Whether it’s under the fiduciary rule [or not], we are going to continue down that path."
"We think this helps more advisers do more planning for more clients. At the end of the day, that's in everyone's best interest," eMoney CEO Ed O'Brien says.
FEES UNDER PRESSURE
Executives note that pressure on fees has been mounting for some time and there are demands for greater transparency around compensation. Preparations that were being made for the Labor Department's rule accelerated those trends.
Over the past year, some firms have cut fees on their platforms. For example, LPL eliminated fees charged for LPL Research models in its Model Wealth Portfolios, resulting in a 15 to 20 basis point cost reduction, according to the company.
Among other changes, LPL is also creating a mutual fund-only tool for its advisers to use, says Bill Morrissey, managing director of business development. The tool will offer about 20 mutual fund families, an "enormous menu of options" for clients, Morrissey says.
LPL says it anticipates that the mutual fund-only tool will have a level upfront load around 3.5% with a 25 basis point trail payment. There will also be no IRA custodial fees or trading costs.
Morrissey says these and other changes are only possible because of LPL's size. With over 14,000 advisers, it's the nation's largest independent broker-dealer.
"Those are examples of some of the things we have done that I think will have broad applications beyond the DoL fiduciary rule," he says.
For its part, Advisor Group unveiled major platform and pricing changes in January. "Our transaction charges are now bundled into an all-in cost that for advisory and brokerage is on average reduced by 50% to $9 and $15 respectively, and our Genesis platform brings minimums down from on average $50,000 to as low as $5,500," the firm said in a statement.
"We spent an enormous amount of time working on our platform and with our partners to figure out how to do this economically," Advisor Group CEO Jamie Price says.
Cutting prices may affect profits in the short term. But Brown says there are long-term benefits to this approach. Advisor Group's investments, she says, will appeal to new recruits and help advisers grow by attracting new assets.
Consultants, vendors and other firms have also jumped into the marketplace to help IBDs, RIAs and other wealth management firms prepare for the rule's implementation.
Since the rule was unveiled in April 2016, Tim Slavin, senior vice president of retirement services at Broadridge Financial Solutions, has met with more than 60 firms. The regulation led executives to re-evaluate their strategies, says Slavin, whose firm specializes in investor communications.
"What funds am I going to offer? Will I offer T shares? Will I cut the number of funds offered? Those are all strategic questions that [were] going on," he says.
Like many other industry insiders, Slavin says that executives preferred changes be made to the rule. But he anticipates many would keep the bulk of the improvements they had made.
"The vast majority of our clients are moving forward," he says. "I had one client say 'I didn't spend $5 million on a consulting firm in order to do nothing.'"
'IN EVERYONE'S BEST INTEREST'
Many firms and consultants have worked hard at improving communications and the delivery of advice.
"It's going to be far more important moving forward to have strict processes and procedures," says Matt Schulte, senior vice president of financial planning at eMoney, a planning software provider owned by Fidelity. "There is a lot of individualism in terms of how folks deliver their advice and services. I think they will need to be operating a little more consistently and understand where there could be gaps in how they deliver the advice."
Executives at eMoney say a framework they created to help advisers and firms operate under the fiduciary rule's requirements will have lasting benefits.
CEO Ed O'Brien points to the firm's aggregation and planning tools as ways that advisers can ensure clients get the advice they need. And he says the firm's framework-based approach helps planners systemize policies and procedures.
"We think this helps more advisers do more planning for more clients. At the end of the day, that's in everyone's best interest," O'Brien says.
Implementing the rule was just one part of Cetera’s strategy, Antoniades says. It's also creating a more advice-centric client experience. To that end, Cetera is working on new client-facing technologies that it will roll out later this year. Antoniades declined to go into detail, but emphasized that this goes beyond new regulation.
"I think too many firms are focused on the status quo, rather than understanding what it will mean to deliver advice in the future. In our opinion, it will be a fundamentally different engagement model," he says.
FORWARD THE FIDUCIARY
Advisers who have been fiduciaries, and advertising themselves as such, face an additional challenge: How can they maintain their edge?
"Ten years ago, saying that you were a fiduciary adviser with $600 million was a differentiator," says Shirl Penney, CEO of Dynasty Financial Partners, which serves wirehouse breakaways and RIAs.
Competition, he says, is getting tougher as more advisers join the independent space and market themselves as fiduciaries.
It's still an advantage with clients, he says, but it's a shrinking one.
"The world is becoming more informed and the big firms are finding more ways to muddy the water," Penney says.
This point has also been on the mind of HighTower CEO Elliot Weissbluth.
"Believing in a fiduciary standard was embedded in our very DNA," he says. "We were designed to embrace a fiduciary duty. We are culturally, commercially aligned with the rule."
He adds: "If you go back and look at our marketing materials in 2008, we have been consistently on this message from day one. We believe in a fiduciary duty and we believe it in a very simple and unambiguous fashion."
In one such ad, a white board video dating from 2012, the firm promotes and explains what a fiduciary is to prospective clients. The ad compares the difference between a broker and a fiduciary adviser to that between a butcher and a nutritionist. The video's bottom line: If you want the healthiest recommendation, you see a nutritionist, not someone likely to suggest a roast beef in lieu of a salad.
HighTower doesn't sell proprietary products. The firm's efforts to comply with the rule did not require huge overalls, he says. HighTower only spent a few million dollars doing so, according to Weissbluth.
But Weissbluth thinks the Labor Department's rule didn't go far enough in promoting a true fiduciary standard. He worried that too many exemptions were created.
"If you were to take that standard and start chipping away at it and you started to make exceptions, or as one of my mentors referred to it, Swiss cheese a rule, then the rule starts to lose its credibility," he says.
Worse, exemptions such as the best interest contract exemption create confusion for investors, Weissbluth says.
"The point is that if you have a fiduciary standard, it's pretty straightforward. It's not that you get to be a fiduciary on Mondays and Tuesdays, and Wednesdays you get to be a salesman," he says.
HighTower remains committed to putting clients’ best interests first and intends to promote what it calls "beyond fiduciary" in upcoming marketing campaigns. Weissbluth declined to discuss the details, but said the intent is to foster a conversation about what it means to really take care of clients' interests.
"I think too many firms are focused on the status quo, rather than understanding what it will mean to deliver advice in the future," says Adam Antoniades, president of Cetera Financial Group.
Trump changes to the Labor Department's regulation might not matter where it counts most for firms: More and more clients are aware of the rule and are asking their advisers about standards of care and how their planner is compensated. And it's not just advisers. LPL's Morrissey says his neighbor recently asked him about it too.
eMoney executives say robo advisers are also playing a role in making clients more price conscious.
"The idea around this concept is becoming more mainstream at the consumer level, and the trend towards transparency will continue," O'Brien says. That's why we like our framework regardless of whether a specific ruling sticks around or not.”
Market forces will also accelerate change. If more clients demand fiduciary services, then the industry will supply them — with or without regulatory prodding.
In short: The fiduciary genie is out of the bottle.
"I think its full steam ahead regardless of what happens in Washington," Slavin says.