Will the DOL’s fiduciary rule spell the end of commission-based broker-dealers?
As the Department of Labor’s recently enacted fiduciary rule takes hold in the investment advisory industry, independent advisors are primed for a boost in business — most likely at the expense of commission-based broker-dealers. Last year, noted financial planning expert Michael Kitces foresaw this sea change in a blog post, “Reinventing The Broker-Dealer Business Model To Survive A DoL Fiduciary Future.”
As the fiduciary rule pushes advisors toward a fee-based, advice-centric model, broker-dealers that depend on commissions for securities transactions face what Kitces termed an “existential crisis.” “If the future of financial advisors is to get paid for advice (not the sale and distribution of securities products), what’s the relevance of a broker-dealer that exists primarily to facilitate the sale and distribution of securities products?” he writes.
The independent advisory channel includes registered investment advisors (RIAs), dually registered financial advisors (professionals able to do business as commission-based independent representatives as well as fee-based RIAs), and independent advisor representatives (IARs). Chip Roame, Managing Partner of Tiburon Partners, estimates between 90,000 and 100,000 independent reps and about 20,000 to 30,000 fee-based RIAs practice today.
In 2016, independent advisors handled $621.4 billion in assets, an 11% jump from the previous year. Roame expects that upswing to continue. He told InsuranceNewsNet.com RIAs and dually registered advisors are “doing extraordinarily well.”
Roame further noted assets flowing into the independent channel have outpaced those into wirehouses. Here are some tips independent advisors can employ to accelerate this momentum.
Give More than Financial Advice
In Schwab’s 2017 Independent Advisor Outlook Study, nearly a third of advisors said following the fiduciary standard of putting the client’s best interest first would give them a competitive advantage. What’s more, 41% of advisors said offering a broad range of advice beyond investing recommendations, wealth and portfolio management tips was the key to differentiating themselves from captive advisors. Independent advisors will increasingly be asked to provide advice on tax guidance, charitable giving, and even non-financial matters such as healthcare planning.
Diversify Your Product Mix
Although the DOL rule has nudged many advisors away from commission-based products, Adam Antoniades, President of Cetera Financial Group, recommends in Investment News that advisors nevertheless offer a diverse service mix spanning both fee- and brokerage products. Having a plethora of offerings enables advisors to find the right product for each client, a tactic that becomes even more important as advisors work with multiple generations.
“With the retail investor landscape increasingly defined by smaller account sizes among millennials and a greater need for yield among baby boomer retirees, brokerage accounts that easily accommodate smaller investors and brokerage products geared at supporting income generation will remain important,” Antoniades stresses.
Use Technology to Streamline Customer Service
The financial advisory industry, Antoniades points out, has yet to be completely taken over by robo-advisors. Clients still want the experience and knowledge of a real advisor. However, independent advisors must assimilate digital technology into their practices. Tech systems can streamline routine tasks so advisors can spend more time building client relationships and focusing on strategic business planning. Advisors apparently agree: 76% of advisors said technological advances will propel growth, according to the Schwab survey.
Nearly 80% of the advisors polled by Schwab anticipate more opportunities than challenges in the coming decade. And those advisors who act as advisors, not merely transactional or product brokers, are poised for success, Antoniades predicts. “Our future will be defined by the need for advisers to focus on financial planning and personal finance coaching to deliver a truly advice-centric experience that helps retail investors meet their life goals.”