DOL Fiduciary Standard: So What?

January 5, 2018


Reality is a strange bedfellow. Last week, April 10th came and went and no fiduciary standard, but the run-up was certainly painful.

We saw 18 stressful and hectic months where firms were dramatically changing their strategies, processes and technologies, and were, in short, stressed. Financial firms were spending vast sums of money on everything DOL. Suddenly implementation has largely stopped, and in the last four months we have been in a state of waiting. Waiting for politics. Waiting for a roadmap as to the future of the DOL fiduciary standard.

And guess what? We are still waiting. With the 60-day delay, DOL continues to be moving forward. Unfortunately, the momentum has slowed, and the luster has dulled. Yet, a positive transformation has begun that has long term ramifications for the industry, and serving the best interests of the investor.

The cultural impact of the DOL fiduciary standard has been huge. Many firms are changing their strategies, bottom up and top down. Last week, I was having coffee with an advisor friend who shared that he had started shifting his business from commission to fee based two years ago in anticipation of DOL. Guess what? He’s thrilled.

Adding to that, he shared that he has changed his outlook on servicing his clients. In short, the new model has built this advisor a better business. Many of the larger broker-dealers that have deeper pockets have transformed and scaled their businesses to be more investor best interest service models, using education and the projected “fear factor.”

As an industry consultant with a front row seat, the transformation in thinking has been omnipresent. Unfortunately, like my garden, if not constantly weeded, the flowers are diminished.

Regardless of where the Department of Labor takes the fiduciary standard, the transformation that has occurred is further building on the inequalities of the “haves” and “have nots.” This phenomenon has been present for years, but the DOL fiduciary standard is further polarizing this reality.

Our belief was that the DOL fiduciary standard, with its regulatory burden, would negatively impact small and medium sized firms resulting in either their shuttering or their absorption into larger firms. A logic shift has occurred over the past six months. Supporting a fiduciary or customer best interest standard has become a competitive issue rather than a regulatory requirement. Both advisor recruiting and retention and customer acquisition and AUM conservation now revolve around a firm’s fiduciary “footprint”.

Our belief is that disparities in process and platforms of products and technologies will continue to place a heavy competitive burden on the small and mid-sized firms. Unfortunately, we see the deck is stacked against these firms. Furthermore, FINRA and the SEC will continue to protect the “best interests” of the investor, regardless of whether DOL is in play or not, which will demand regulatory infrastructure investment. The end result will be that the 1099 business model will be overrun by the expense model for modest firms.

However, there is a brighter future for our industry because of the changes the preparing for the rule change has wrought. Broker-dealers are becoming more investor centric. The DOL fiduciary standard was a vehicle to build guardrails and confidence into an industry that has not always been considered aligned with their customer’s interests.

While the recent rhetoric has been that DOL is dead, that may be a premature assessment. The reality is new generations of investors have higher expectations of transparency, technology and investing. The new expectation is that their advisor is going to do what is best for them.

Over 92 percent of the 193,000 comments opposed delaying the rollout of the rule. Very few that I have talked to in the industry knock the intention rule. The complaint has always been about the ambiguity of a principles-based regulation that only include qualified accounts.

So what? The legacy of DOL’s fiduciary standard is that more and more broker-dealers and their advisors are embracing that they really do have a fiduciary responsibility to their customers. The rub is that the only constant is change. More change than our industry has ever seen. Stay tuned.