Making Lemonade from Lemons: The DOL Opportunity

Within the industry, uncertainty around the DoL’s ruling prevails as advisors struggle to reevaluate their strategies, especially as it pertains to commission-based revenue.

It is estimated that the financial advice industry derives almost 45% of their revenue from commissions as of 2015. As a result, many advisors and their broker dealers have been thrown off balance by the new policy.

Though the impact of the new policies is large for the representative and the independent broker dealer (IBD), the law may act as motivation for firms to produce better outcomes for customers, a more dependable cash flow for advisers, and a more durable model for IBDs. In the past, many IBDs have acted as product gatekeepers, compliance, and transaction accounting arms to advisers. The expected increase in regulatory burden combined with continued pressure on commission revenue will drive the industry to a new operating model.

Though added regulatory burden is not new to the broker dealer industry, it is the opinion of many that the DoL ruling will be the most profound change experienced by the industry since the deregulation of commissions in 1975. Changes of this magnitude can make for a dramatic change in the composition of the winners and losers. In an attempt to make lemonade from lemons, IBDs can look to drive a higher level investment offering to advisers and their clients with hopes it results in increased fee-only revenue and a more durable relationship with clients.

The investment ecosystem has grown accustomed to delivering isolated products that serve a specific purpose and passing the burden of creating a durable and lasting investment solution onto the adviser. Up to this point, this practice was acceptable, as representatives acted in a more transactional manner, even when they offered much more to the end client. The structure trivialized the value that representatives were best positioned to provide, but this changes under the new ruling.

So where is the opportunity?

A forward-thinking IBD can act as an implementation arm for a rigorous and responsive investment workflow. Through defining and applying best practices, the IBD can arm the adviser with tools and workflows that drive a better solution for the client, lessen the chances of non-compliance, and increase the productivity of their representatives. A win-win-win approach.

IBDs should look at defining the major steps for representatives in order to institute best practices:

(1) Define the risk appetite and needs of the client,

(2) Have an offering that produces the desired outcomes at a low cost,

(3) Allow for the easy customization of a solution tailored to the unique needs of the client without risking unexpected exposures, and

(4) Do this all in a way that can be profitable.


The tools that touch on each are readily available, and fintech providers are working aggressively to integrate and ease implementation. As a means of lessening the ramp up time and ongoing maintenance needs, IBDs should look at the various workflows (risk assessment, investment direction, portfolio trading & reporting, etc) to determine which are best, if any, to produce in-house, and conversely, which are better to source externally.

Many of the workflows such as those focused on risk assessment and portfolio trading and reporting have been successfully addressed but the investment direction workflow has had less attention. With the sheer quantity of investment options in the market, an IBD is easily overwhelmed by the options available, seeing only products when what they crave is a workflow solution. This is changing as some newer investment managers look to drive innovative ideas into the established investment approaches. These include a deeper interaction with peers and with technology vendors to establish tailored and responsive portfolios that meet the needs of IBDs, representatives, and most importantly, their clients.

The changes impacting the industry will force IBD’s to make a hard and strategic decision: does it attempt to build a complete offering internally, or does it leverage outside expertise to increase the depth of expertise and quicken time to market?

There are pros and cons of both options, and an IBD will need to make the choice based on its current position and the resources it can bring to the table. Below are some additional questions that may help with the process.

  • Does an externally driven approach decrease an IBD’s ability to control its own destiny?
  • Are the necessary skill sets resident within the organization now?
  • If the IBD does not have the investment expertise available internally, can it build expertise quickly?
  • Will keeping the investment process internal reduce expenses when all costs are included?
  • Will it have the internal policies and procedures in place that would lessen the chances of regulatory issues?
  • Can the IBD provide the level of investment support that will be required of their representatives to win and maintain business?
  • IBDs need to adapt to the changing regulatory landscape and may see these changes as an additional burden to the traditional business model. However, they can choose to view the DoL’s ruling as an opportunity to strengthen their business and the connections they have with their representatives and their end clients. While the ruling is certainly disruptive, the changes it brings about are not necessarily negative. In a shifting industry, there is always a way to adapt and better one’s business practices.