What do you remember from 1974? Take a minute and think back, if you can. Most of you might remember President Nixon’s resignation, while others might recall Barbra Streisand’s "The Way We Were" topped the charts and The Godfather: Part II was released. Even a few may remember Phillippe Petit’s stunning tightrope walk across the Twin Towers.
How about the Employee Retirement Income Security Act of 1974 (ERISA)? Didn’t think so. Prior to 1974, employers (rather than individuals) were largely responsible for investment decisions related to pension plans that contributed to employee’s retirement ability.
The introduction of ERISA marked a profound change in how we plan for our financial future. This onus started to shift to the individual and this continued, in 1978, with the introduction of the 401(k), further moving the responsibility for financial knowledge, investment expertise, and saving to the individual.
Fast forward 40+ years, and financial products have become increasingly complex. Investors rely on experts to help make the right financial decisions. Pensions, once a common benefit of employment, are now rare, having been largely replaced by the 401(k) and IRAs.
Technology has also changed
It is 2016 and The Consumer Revolution is here. Investors want information on their smartphone at low cost with high value, and challenge some of the assumptions and standard wealth management business practices. Most of the established institutions within the financial services industry have been slow to adopt and change to consumer needs. Furthermore, the rise of the robo-advisor leads some (myself included) to wonder if we are seeing the death of the AUM Model.
Despite being able to order a pizza on Twitter and open my hotel room’s door with my iPhone, investing remains hopelessly complicated to the masses, and the compensation behind it all is even more murky to the investor.
The DOL believes that we have not updated the rules of compensation and fiduciary responsibility to match the monumental shift in investing and investor behavior. The impending impact cannot be understated. The next 30 years will see a staggering $30 trillion move from Baby Boomers to Gen X and Millennials. In the next 5 years alone, $2.5 trillion is expected to change hands.
Over 40 years after the introduction of IRAs and 401(k)s, investors that have been saving their entire careers now start the process of “rollovers,” where the fiduciary responsibility and oversight was higher with their employer than the retail IRA marketplace. Thus, the DOL is seeking to ensure that the looming compensation associated with massive transfer of wealth remains in the best interest of the client and not the advisor. At this point, many of the answers are still unknown. However, it’s becoming clear that advisors focused on financial planning will be better prepared for the changes to the fiduciary standard.
This gets to the core issue for investors: trust
Trust remains the reason investors pick their advisor. There are a ton of smart, engaged, and honest advisors; however, a small fraction make headlines for the wrong reasons. One of the core paradigm shifts I expect to see with the DOL proposal is increased oversight for all advisors because of the actions of a few.
Thus, the proposal seeks to tighten the definition of an advisor’s fiduciary standard, which will increase the responsibility of the advisor to act in the client’s best interest. This oversight is designed to validate or increase the trust we have in financial advisors. In concept, this is good; however, the implications of how it works are really messy.
This change in fiduciary responsibility is forcing the industry to change compensation, workflow, processes, disclaimers, and advice in a hurry. I am going to spare you the gory details; however, within the Fortune 500 companies I work with, I see three predictable groups: the early adopters, the wait-and-see group, and the “let’s lobby against this crap” camp. I will withhold judgement for now, but predictably the latter two groups are not happy with this change and industry feedback has been largely negative.
Overall, there is a lot of talk in the industry about the negatives of the DOL Fiduciary Rule. Here are two positives I see:
Holistic planning leads to CYA (cover-your-a$$)
The statistics on American’s lack of financial planning is disconcerting. Take a look at some latest research from Northwestern Mutual:
- The vast majority (69 percent) of U.S. adults are taking a self-directed approach to planning which may be exacerbating already complex financial challenges, according to our study. It also reveals that U.S. adults are deeply concerned about financial security before and during retirement, yet:
- Less than half (40 percent) have set goals for their financial future and only 20% have developed a written financial plan
- Among those with a financial plan, less than 1 in 10 (9%) are extremely confident that the plan can withstand market cycles
- Thirty percent of U.S. adults say they are “not at all financially prepared” to live to the relatively “young” age of 75 while more than a third do not have any sense of how much income they may need in retirement
- 62 percent of working Americans expecting to delay retirement by necessity, citing insufficient savings as a top reason
The DOL rule change should serve as a reminder to the industry that holistic and collaborative financial planning is at the core of advisor-client relationships. Yes, that means a written plan (although, the Millennial in me wants an electronic version). The client relationship is centered around holistic financial planning and this is where trust is built.
Holistic planning should also be considered a step of protecting the advisor from potential litigation stemming from the expansion of the fiduciary standard. As the industry more formally asks, “Is this in the client’s best interest?” The answer should be documented in a financial plan.
There is a disconnect from the amount of clients that self-identify wanting a written plan and the number that actually get one. The DOL’s rule change might serve to decrease this gap, ultimately increasing the value a client receives. Many firms in the “early adopter” camp are already evaluating their current technology and asking, “How can we make the planning process more collaborative?”
These firms will benefit from not only satisfying the existing need for planning, but will be ahead of the curve when the rule change puts an emphasis on data entry and compliance as a way to verify if an advisor’s recommendation is in their client’s best interest.
Increased utilization of technology through workflows
The DOL rule will create better workflows for advisors who work for financial institutions that utilize enterprise software. Data entry and compliance is a pain, but it does not have to be. Tools with an open architecture platform that allows for the design of workflows and integrations can alleviate much of the anticipated pain from the DOL’s rule change. The right consultant or vendor will look to fill in the gaps in your current technology stack, eliminating information silos.
For example, one of my partners is looking to modify report disclosures to show when and from where account data is coming. Is this data coming from an internal system, outside data, or manual entry? With the addition of account aggregation this type of information can be verified by a third party, recorded automatically, and the advisor does not need to waste time keying in information. Compliance is happy and the advisor is happy.
Another partner is determining how increased scrutiny on plan approval will change the plan approval hierarchy at their organization. By adapting better internal workflows, this organization will be ready for any interpretation of the forthcoming rules.
Beyond compliance and data entry, Financial Planning 2.0 at enterprise firms will be about financial data. That data only exists if your current workflows capture and share that information. A thorough analysis of every step of data entry and capture from prospect to client is hard and time-consuming, but worth it. The result will be advisors who are excited about how technology enables them to have more sophisticated planning conversations and a more intimate view of their client’s finances.
We are seeing workflows within technology changing to meet the needs of compliance departments, digital marketing officers, and executive leadership’s desire for better data. No longer is it only about the financial plan. Now every interaction with the client can involve technology that supports the global mission of an organization.
Advicent is a provider of SaaS technology solutions for the financial services industry, servicing the world’s largest financial institutions. Through our innovative product capabilities and dedicated services we are able to help thousands of financial professionals and their clients understand and impact their financial future. Our mission? To one-day enable everyone to achieve this same goal.
Narrator Connect, a configurable application builder from Advicent, allows you to go beyond basic color and logo changes to truly tell your story and differentiate your business. Provide an experience that guides clients through any step of the planning process on any device— from identifying needs, to finding the right advisor and product, to setting goals. You can give clients one consistent experience from their first interaction with you to their last.
If you read this far: Tag someone else to read it. Share it with a colleague, and start a discussion. These changing rules will affect the financial services industry greatly in the coming years, and we need to be prepared.
If you have any questions, please call (855) 885-7526 to speak with an Advicent representative.