The U.S. Department of Labor’s (DOL) new fiduciary rule has the financial services industry a bit distressed. The rule – which will begin to take effect on April 10, 2017 – will elicit a major adjustment to the way financial advice is provided in the United States, challenging financial advisors to re-shape their traditional business models. Advisors will be required to shift from commission to fee-based compensation in order to avoid potential conflicts of interest. And though this will keep advisors from putting their own interests above the interests of their clients, the rule doesn’t completely prohibit commissions or revenue sharing. Advisors can operate under the Best Interest Contract Exemption (BICE) or the Principal Transactions Exemption, given they comply with the strict conditions of each. While these exemptions help make transitioning to the new standard a bit easier, it can be risky. Investors with either exemption in place will be able to sue their advisors if they believe their interests haven’t come first.
In order to avoid the perceived risk, liability, and increased cost of compliance, some advisors have decided to leave the business altogether. If you don’t think you are DOL ready, it doesn’t mean you have to sell your practice, however. You have several options.
Remember that the fiduciary rule only applies to retirement accounts. If your firm has generalists who are providing guidance in respect to all types of accounts, they only need to stop advising retirement accounts. You can still sell non-traded REITs and offer non-qualified variable or equity-indexed annuities, even with commissions, as long as you only sell into non-qualified accounts.
If you want your firm to continue to work with retirement accounts, you might consider bringing on some new team members. One option would be to hire specialist advisors to take over the retirement account part of the business, or you mind find a service that can handle the back end while advisors maintain their existing client relationships. Another option would be to bring on a junior advisor to help keep things running smoothly as you transition into compliance with the new regulations. Doing so could have other perks as well – you would be giving yourself and your practice the freedom to grow amidst the changing business climate, and setting yourself (and others) up for future success.
The changes you may or may not have to make are also dependent on the size of your firm. Large independent broker-dealers (IBDs) will most likely have the resources to make the adjustment towards compliance with the DOL rule, and registered investment advisors (RIAs) will only have small operational changes to make since they are already held to a “best interest” standard. Some smaller IBDs and RIAs, however, may need to consider pursuing mergers to help build scale and skills they’ll need to adjust as well as offset the costs associated with the changes.
It’s true that these changes can be costly and require some effort on your part, but it might be the way to go if you feel you cannot currently be compliant with the rule but don’t want to sell your practice. Furthermore, making the effort to ensure that your firm will still be able to offer services to clients with retirement accounts under the new rule will surely reaffirm their value to your business and reinforce their confidence in you.
Looking for more information on the DOL? Download our white paper here: http://dol.successionlink.com