Why Advisors Need to See the DoL Rule Through Their Clients Eyes
Now that the Department of Labor's fiduciary rule — or the “conflict of interest rule,” as they called it in the press conference — is here, advisors are faced with a choice: either own the rule, embrace being a fiduciary and adhere to the requirements, or hang up their spreadsheets and Ibbotson charts.
Over the last few weeks, I have heard of a number of plans to address the fiduciary rule. Most of them were focused on one of two things:
1) How do we best implement the Beneficial Interest Contract (BIC) exemptions?
2) How can I do the bare minimum to keep my clients and still qualify as a fiduciary?
Both of these questions seem to be a cop out – and more importantly, a missed opportunity.
Both are trying to take a transformative rule and apply it to business as usual. They are striving for status quo, instead of creating a better business and potentially better client relationships. In effect, they are giving up.
As the exact wording and implications of the exemptions are worked out, I keep coming back to the a few things that make the BIC a deal breaker for me. It is not that administering the exemptions will be a compliance nightmare (which it will be), but how advisors will have to explain their choice to employ that exemption to their clients.
How easy do you think it will be to tell your clients that, while the rule from the DOL requires you to do something else, you are applying for an exemption so you can get paid a different way? When do you think the client will start questioning your motives and business practices?
Also remember, when clients are paying you a fee, they determine whether you are adding value for the fee charged. If they don’t see value, they’ll fire you. With the BIC exceptions, the onus is on you to justify your compensation to clients – or should I say their attorneys, as this will be big business for tort attorneys.
Is this the business model that advisors were hoping for?
PLAYING OUT SHARE CLASS SCENARIOS
A number of conversations with advisors have centered on what they are going to do with their A-share or C-share funds. Many advisors say they would simply transfer to Institutional share classes or use a new platform that will allow them to keep their respective favorite fund family and retail funds intact. Let’s play these scenarios out.
Scenario A - Just convert the shares to Institutional share class.
Now you’re in the business of billing your clients each quarter for advice. Do you really want to be in the messy business of direct billing clients?
Scenario B - Convert the shares to an Institutional class, but put them with a custodian or platform provider to facilitate billing and statements.
- You will have to re-paper your clients, so you need to have to have a discussion about the change.
- The fee is now going to be transparent. Your clients say: “I’m getting the same thing that I did before, but now you are going to charge me?” No matter how many times you’ve spelled out fees and loads, you now need an answer to “What do you mean, I was paying you before but it was ‘hidden’?”
- You’ll have to set up new accounts for fees (such as a money market) to facilitate the fee accounts (so yes, more paperwork).
- There’s an added layer of fees – even if the Institutional class is less expensive, the new platform or custodian will have to be paid, so the net/net may not change much (depending on the size of the account).
- More considerations: Are there additional fees at the new custodian? IRA fees? Are there minimum account sizes or other fees?
Since the client is getting basically the same thing that they had before, now it costs possibly more and the fees are transparent. Why wouldn’t they begin to look elsewhere?
OWN IT OR GO HOME
In 2013, the UK government initiated a rule called the Retail Distribution Review (RDR) and gave firms 3 years to comply with new rules around compensation (elimination of commissions) and licensing (newer, stricter requirements). Since the rule was created, advisors have seen an increase in regulatory costs, and a 25% reduction in the advisor force, causing a shortage of advisors.
Why should we care about this?
Because we are facing a similar issue and a similar choice.
While we may see modifications to the new DOL rule, it is my belief that this is only the first step of many pushing advisors into a 100% fee businesses. We can complain and try to fit it into our existing model, or we can own it, creating a new offering based on what the rule gives us.
I think we should own it.
John Anderson is managing director, practice management solutions, SEI Advisor Network.
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