Surviving the New Fiduciary Rules


If you’re a financial advisor, then you’re probably already well aware of the Labor Department’s new fiduciary rules. These rules will undoubtedly create a whole lot of change, not only in the way you do business, but also throughout the entire industry.

The new rules are designed to replace the prior principle governing financial advisers, the well-known “suitability standard.”

Here’s a short-hand guide to what you’ll need to know about the new rules and your business.

Fiduciary Standard: The fiduciary standard applies to any person providing investment advice, if that person A) provides recommendations on the purchase, holding, disposing or exchange of securities or property, including those being affected by a rollover of or distribution from a retirement plan or IRA. B) makes investment management recommendations, C) appraises investments, and D) makes recommendations of individuals who provide advice for a fee.

Best Interest Contract Exemption (BICE): This permits some variable compensation for advisors and financial institutions in some cases, but that is subject to compliance with detailed conditions. Any compensation of this sort requires that parties enter into an enforceable contract.

Prohibited Transaction: Under the new standard, any transaction in which a financial advisor has a conflict of interest would be considered a so-called Prohibited Transaction (or PT). This includes any situation where an advisor would receive more compensation if the investor were to make a given transaction. An advisor can go through with that transaction, but first he/she must get a Prohibited Transaction Exemption (PTE).

So, what do these new rules mean for the industry as a whole, and what might that mean for your business?

Some of the more insightful answers we’ve found to these questions came from one of the most prominent, and most successful, RIAs around—Ric Edelman of Edelman Financial Services.

In an interview with the website ThinkAdvisor, Edelman predicted that within the next decade, as many as half of all current financial advisors will have left the industry due to fiduciary rules. He also predicted that before the rules go into effect in January 2018, many advisory firms will be forced out of business.

According to Edelman:

For advisors whose value proposition is price and performance – sales pitch is “I’ll make you more money, and I’ll do it cheaper” – those guys are likely to become extinct. They won’t be able to deliver higher returns and charge less. Therefore, to justify their existence, they’ll have to find a different value proposition because consumers will find other practitioners who can deliver.”

We agree with this, and we think the value proposition advisors can offer is more knowledge about the markets, and better knowledge about the markets.

Edelman also warned that the new fiduciary rules will come with the potential of lawsuits, and that also will scare away many advisors as well as many firms:

The element that’s perhaps the scariest for the industry is that the rules are going to allow lawsuits. Arbitration will no longer be the only recourse that consumers have. Arbitrations are case-by-case and confidential. Lawsuits are not only public but they can be converted into class action suits. Arbitration insulated companies from those. We believe that, to protect themselves against the risk of lawsuits, many firms will sharply reduce the products they allow their reps to sell.

When asked what type of firms he thought were the most vulnerable and most likely to be negatively affected by the new rules, Edelman offered the following analysis:

Brokerages that generate a majority of revenue from commissioned products. Some [derive] 100% of their revenue from products such as non-traded REITS, life insurance or equity-indexed annuities [fixed-index annuities], which pay 8% commissions. It’s highly unlikely that these products will survive the fiduciary standard. This would have an impact not merely on the advisor but the firm they’re registered with. So entire brokerage firms may see a dramatic reduction in revenue as high-commissioned products are no longer being sold to the degree they once were.

Basically, Edelman is saying that if your business is based on high-fee, high-commission products, then now is the time to think about retooling that business.

If you are advising clients with their retirement money, you’re going to have to be much-more client focused.

One way to do that is to know what’s right for your clients. Another way to do that is to know all about what’s going on in equities, bonds, commodities, currencies—and to be intimately familiar with the way all of the macro-economic and geopolitical influences each asset class.

Having the right knowledge will set you apart from your competition…even if you are more restricted when it comes to the strategies you offer and the products you sell.








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