How changes to the fiduciary rule could prompt adviser movement

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Recruiting has been relatively quiet this year – a function, in part, of a major piece of uncertainty. No one is quite sure how regulators will ultimately expect financial advisers to implement the fiduciary rule in their practices. Advisers can't make strategic business decisions if they don't know what the rules of the game are.

Earlier this year, the Trump administration ordered the Department of Labor to review its controversial regulation. Though the department declined to further postpone the first stage of the fiduciary rule's implementation, it is conducting the review and soliciting industry feedback on possibly rescinding or amending the regulation. Moreover, the Labor Department is considering postponing implementing the remaining elements of the fiduciary rule.

That means, once the details of the fiduciary standard are finalized, advisers are likely to take fresh looks at their practices. Many could decide they are better off elsewhere based on how each firm develops policies in response to the new rules. Advisers need to know that a new firm has the technology and resources in place to help them comply with the new regulations. Also, they need to understand precisely which investments a new firm will allow them to make in client retirement accounts.

Advisers are also waiting to gain clarity on compensation. Many are nervous that the fiduciary standard will translate into smaller paychecks. They want to know whether the new rule will restrict or end their ability to do commission business in retirement accounts.

Advisers who suddenly find themselves making less, often move more. That's because many advisers use a lucrative recruiting deal from a rival firm or the higher payout of an independent firm to offset the hit to their paychecks.

Thus far, the impact of the fiduciary rule on adviser income has been minimal. Advisers who formerly sold A share funds in retirement accounts for 5% or 5.5% loads, will now be restricted to cheaper share classes. For example, LPL is capping mutual fund fees in qualified accounts at 3% to 3.5%. Wells Fargo will reportedly allow advisers to sell only T-share mutual funds, which have 2.5%.

Many advisers use fee-based funds ― so pay cuts in commission-based funds aren't necessarily a big deal. But firms are seeking to reduce and level fees across different product classes to eliminate the incentive for advisers to recommend one product versus another. That's a net positive for clients; it also means that adviser take-home pay could take a haircut.

The net result: Once the rule is finalized, if it leads to a reduction in broker pay, advisers will think of ways to eke as much as they can from their business strategy before their 12-month trailing commissions and fees begin to trail lower. Advisers may use a move as an opportunity to reverse a downturn in revenues and monetize their businesses. Some advisers will hit the bid at rival wirehouse and regional firms who offer generous recruiting packages. Others may try to boost their income by affiliating with independent broker-dealers who offer 90% payouts or they will become RIAs.

The situation now makes me think a bit of the activity spurred after the 2008 market crash. The following year was a record-breaker for adviser movement. Advisers offered clients a fresh start at a new firm while shoring up their own net worth by cutting deals with rival firms. The crash posed a far more serious challenge to adviser income than the current scenario but the dynamic is similar. For hiring firms, this could be a good opportunity to attract talent if they are able to clarify quickly how they will respond to an amended fiduciary rule and make it attractive for advisers to build their practices with them.

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