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Post-Fiduciary: Leverage Digital Tools to Stay Profitable

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The newly published fiduciary rule is, at first glance, a win for consumers and will result in some big changes for the industry. However, some of these changes will have negative side-effects for advisors, who will face more regulatory overhead costs which translate to lower profits.

Additionally, it may not actually benefit the client to switch to a fee-based account, and may exclude smaller clients from proper advice. These externalities of the rules that were intended to protect investors become particularly tenuous when a retiring client rolls over her 401(k) accounts.

Let’s first look at the options for financial advisors who have a broker registration: 

  1. Keep the commission business with the BIC exemption, which requires complete transparency of compensation, individual client signature, and demonstrating the representation of a client’s best interest;
  2. Converting to fee-based, which means more responsibility as a fiduciary, but potentially lower profitability for smaller accounts;
  3. Drop smaller commission-based accounts and let them fend for themselves; or
  4. Just execute client-directed trades instead of providing advice.

The last two options are not palatable as they do not allow advisors to add value. If clients are already comfortable with DIY-investing, they could have already done so themselves with a robo advisor or low-cost brokerage.
However, the demographic that will be indirectly affected by this rule is the newly retired. This is not the segment that touts their ability to complete free trades on Robinhood. In fact, they are perhaps the most vulnerable group psychologically and financially.


In my previous article, "Tinder Understands its Users Better than Most Robo Advisors", I mentioned that fee-based accounts do not necessarily mean more suitable, nor does it mean lower cost.

During my earlier career, one project was to convert a multi-asset mutual fund strategy into a model portfolio of ETFs and mutual funds to be delivered on a TAMPS for broker-dealers. This was to justify the wrap fee for the broker, and often served as the core asset allocation. I have since joked that this practice is analogous to pouring a large bottle of soda into smaller bottles, selling them in one package and then charging more for the plastic.

End clients get the feeling that it they are getting cross-asset, diversified advice in a fee-based account, even though they could have received the same return profile at a lower cost with the mutual fund in a commission-based account.

This is an issue for a vulnerable group like the newly retired, who are completely unaware of it.

So, how can advisors protect themselves while helping clients? We believe technology can help both parties make an easier transition and ensure optimal services.

  • Select the Right Type of Account by Fees

When an advisor helps the client understand the tradeoffs between the BIC exemption and fee-based, it shouldn’t just be about the fees visible to the client, but should comparenet returns on all fees.
While the industry norm is eschewing the value of active management and manager selection, this is part of the fiduciary’s value that clients pay for.

Using return simulation tools can enable clients to compare and comprehend the net return of all fees in different account structures, demonstrating the advisor’s transparency and credibility, and generate better performance which ultimately helps retain the client.

  • Involve Clients in Know-Your-Customer

If transitioning to a fee-based account is warranted, Know-your-Customer doesn’t have to be onerous with better technology. Today’s advisors have the option to efficiently learn about a client via APIs and account aggregation tools. 
Despite the mounting workload in transitioning accounts, lowering standards of KYC is not an option given FINRA and SEC’s increased scrutiny. Advisors can proficiently conduct comprehensive KYC with a client-driven onboarding experience that unearth multi-dimensional exposures.

  • Monitor Firm-level Suitability

Besides heeding high-fee annuities and structural products in retirement accounts, broker-dealers face another suitability challenge: the prevalent risk profiling is not defensible. Advisors have difficulty supporting why a client should be in a “moderately aggressive” portfolio, as they can no longer simplistically place them into a set of investments.  
A direct solution would be to support the suitability of portfolio recommendation with a thoughtful approach that considers a client’s goals, tolerance, and detailed personal circumstances. In addition, leadership at a broker-dealer can utilize analytics on suitability across the firm to proactively mitigate these risks. This can be done by visualizing suitability by client or advisor segment, and then drilling down to the accounts potentially at risk.

While conforming to the new rule looks daunting, it’s not rocket science. Broker-dealer firms and their advisors can have orderly transitions that protect their clients, their bottom line, and help them avoid lawsuits by figuring out the best option for each client and leveraging proper technology.

Min Zhang, CFA, is chief executive and co-founder of Totum Wealth.

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