Dr. Craig Lemoine, CFP®, Associate Professor of Financial Services and Director of The American College Granum Center for Financial Security, takes a moment to reflect, offering his insight and thoughts about the financial services profession and making predictions for the future.
Changing leaves and pumpkins give way to turkeys and holiday lights. Autumn is here, and soon we will see 2017. And with the new year comes a countdown to April 10th. On that day the profession will unite under one fiduciary banner. We will begin acting with prudence, objectivity and place the interest of retirement investors in front of our own. From a theory standpoint, the new DOL fiduciary rule brings consistency of client care and messaging – we are all fiduciaries. The following article is not the opinion of The College, but my own thoughts as a professor on the future of our profession.
The rule sweeps conflicted and self-dealing compensation models away from retirement advice into PTEs. The PTEs provide guidance and expectations for financial service professionals from all backgrounds:
- Fee-oriented planners (level fee exemption or BICE Lite)
- Those selling fixed products (84/24)
- Those working with commission products in variable markets (BICE)
A uniform fiduciary standard stretches across these PTEs. Both financial institutions and agents have clear guidelines to follow.
Theory is important. Theory helps advisors understand planning framework and adapt their mental models. But without concrete plans, theory can also lead to heated conversations. The new DOL rule has already generated hairline cracks in today’s status quo. These cracks will quickly spread, evolve and potentially push the profession to buy a few new windshields:
1. Dramatically fewer investment options will be available in qualified plans and IRA accounts.
The fiduciary duties of prudence and loyalty create incentives to recommend low-cost investment and retirement plan options. An economy of scale presents the opportunity to lower costs, and fewer larger index funds fit the bill. Government thrift-style retirement plan options may bring less litigation; questions and more readily exhibit prudence.
2. Say goodbye to sales incentives and reward trips.
The Department of Labor is requiring financial institutions to establish procedures that reinforce a fiduciary duty. Impartial conduct standards will become paramount. Firms may still reward agents but must do so in a way that promotes fiduciary conduct rather than the sale of specific products. Look for more required education sessions on the beach.
3. Recruiting practices will change.
Today firms recruit and poach successful reps from one another using front-end bonuses, deferred compensation promises and occasionally a less-than-opaque wink and nod. These practices fly in the face of incentivizing fiduciary obligations. Moving forward recruiting will be focused on client value, rather than purse weight.
4. Reconsider your value proposition.
The property-casualty industry has experienced enormous shifts with the advent of online distribution and commoditization. Retirement investment advice is on the edge of following the same path. ETF costs are dropping (close to 0.10 percent) and will continue to press down as new economies of scale emerge. With P&C and asset management off the table, what is your value to the client? Counseling? Risk management? Goal setting? Something similar to an executive coach? Social Security advice? Our profession needs to find value quickly and reinforce that value to our clients.
5. New compensation models will succeed.
The DOL rule impacts compensation models that are self-dealing or have conflicts. This covers commissions, AUM, and hourly planning models. We need to move outside of the box. Monthly and annual subscription models can be conflict-free. And those models are more attractive to millennial clients. Base compensation on talent and value. While today the idea is foreign, 10 years from now we all may be clamoring for flat monthly billing and access to a suite of personal finance tools.
6. Be positioned to take advantage of advisors leaving the business.
Some large mutual and stock insurance companies are on the cusp of taking their ball and going home. Older advisors may decide a new fiduciary environment is too much. As the supply of books of business for sale increases, their price will fall. Young advisors working in fiduciary environments will take advantage of this opportunity. If you have capital to expand, 2017 will be the year.
To quote one of my favorite shows, “Winter is coming.”
The rule is comprehensive and will change the environment; let’s be ready for those changes. The rule does not crush the industry and those nimble and ready will find a way to succeed. Learn more about how the Department of Labor’s fiduciary rule is changing the landscape of financial services by reading 5 Things You Didn’t Know About the Conflict of Interest Rule But Should.
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