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4 Less Obvious Points to Consider Regarding DOL Fiduciary Standards Ruling

Just before year-end 2015, I wrote a piece entitled Awaiting the DOL Storm . Its premise was that advisors were awaiting a major shift in the regulatory environment and expecting the worst, but hoping for the best. Certainly, since the beginning of April of this year when the DOL released the rule (which won’t take effect until next April), much has been written about the implications for our industry.

I won’t bore you with yet another article on the reported details of the rule; however I will share some of the less obvious points to consider:

  • While it appears that advisors dodged a bullet relative to how onerous the DOL ruling is, it is NOT a non-event. Senior leaders at major brokerage firms (wirehouses, regionals and independents) are deep in the labs trying to interpret the 1000+ page rule and come up with new policies and procedures to protect and corral their advisors. The advisors are holding their breaths, waiting to see if – as a result – their compensation will be affected, client fees increased, and if commission business and the sale of annuities will still be welcome.
  • It may be truer than ever that scale matters. To be sure, smaller broker dealers are struggling to invest appropriately in the technology, infrastructure and platform required as the regulatory environment changes. While advisors that work under these boutique umbrellas value how nimble their broker-dealers can be and the access they have to senior leaders, many tell us that they are worried—while nimble is nice, protected is better. “Is my broker-dealer resourced well enough to build comprehensive compliance programs around the rule’s requirements?” As a result, we will likely see more transactions being done where large, scaled broker-dealers acquire their smaller counterparts.
  • The big open-item is whether the SEC will step up and decide to enact a uniform fiduciary standard. This possibility certainly raises the question for advisors whose businesses are a large percentage commission based. Will these advisors be relegated even more to dinosaur status and will firms be interested in continuing to recruit them? We have seen a spike recently in the number of transaction-based advisors wanting to explore options beyond their current firm – and, almost without exception, they talk of wanting to make a desired move before it’s too late – before firms close their doors to non-fee based folks.
  • There will likely be a greater migration to the fee-only RIA space because RIAs are already held to a fiduciary or “best interest” standard and there will be many fewer operational changes required of them. This could potentially create some dilution of the marketing message that RIAs use to differentiate themselves: “We are fiduciaries and our broker-dealer colleagues are not.” Even within the RIA world, we expect to see consolidation, as smaller firms struggle to comply with an ever-changing regulatory mandate.
  • While there seems to be no shortage of information on pending regulation, the fact remains that none of us has a crystal ball that will prognosticate the exact events that will unfold. As such, it seems to me that now – more than ever – advisors should take this time of relative calm to assess their business models, goals and relationships with their firms in order to decide if they are ready for potential downpours ahead.