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What Advisors Need to Know About the DOL Fiduciary Rule

What Broker-Dealers and Advisors Need to Know About the DOL Fiduciary Rule

Posted By: Kaplan Financial Education
Updated: July 28, 2017 

The Department of Labor (DOL) fiduciary rule is the biggest regulation change in the financial services industry since the Employee Retirement Income Security Act of 1974 (ERISA) in the mid-1970s. The DOL fiduciary rule aims to ensure that financial advice is always in the best interest of retirement investors, thus protecting investors from any unfair advisor or broker commission practices. The rule is slated to take effect in June 2017, unless the Trump administration is successfully able to repeal or change it.

Assuming the DOL fiduciary rule proceeds as planned, it will likely be toughest on small, independent broker-dealers and IAR firms. According to a LIMRA Secure Retirement study, more than half of broker-dealers believe some of their advisors will retire rather than sell under the new business rules of the DOL fiduciary rule. Compliance costs are expected to rise. Advisors and registered representatives who advise on 401(k) plans may be forced out of that business with new compliance rules, and annuity vendors will have to start disclosing their commissions to clients, which could reduce sales significantly of these products in many cases. In addition, with greater scrutiny comes the possibility for more lawsuits.The LIMRA Secure Retirement study also revealed that three in four broker-dealers surveyed believe the DOL fiduciary rule will exacerbate the risk of litigation.

For the stated reasons above, many advisors and broker-dealers are viewing the DOL fiduciary rule as a threat, but it is actually a huge opportunity for advisor recruitment, client acquisition, and overall growth. Understanding the need to move to a more holistic, advice-based practice and putting it into action could help you thrive in this new era of financial services.

A holistic, advice-based approach to fees is the future.

For financial advisors and firms still operating under transaction-based advice or fee-based advice (where fees are based on assets under management or AUM), the new rule provides the opportunity to improve your value proposition and business model. Rather than just adding compliance-focused policies, it is an opportunity to transform your business model into a holistic approach, where fees are based on advice, not on AUM. This will be the business model of the future, and it will be the centerpiece of your value.

In the United States, 10,000 people are turning 65 each day. These same people will be using their retirement accounts for income. Helping investors spend their retirement dollars smartly will be an increasingly important element of an advisor’s value proposition as their clients age. An asset-based fee approach would lead to a decline in revenue and possible temptation to provide advice that serves the advisor’s interest, not the client’s desire to enjoy the retirement lifestyle they have earned. An advice-based fee model would reward the advisor for unraveling the complexity of converting money from retirement accounts into retirement income. 

It is likely the fiduciary rule on qualified retirement assets is only the beginning. More rules are projected to come in the future from the Securities and Exchange Commission (SEC). The SEC will set their own fiduciary rules beyond retirement accounts and require IARs and brokers to put their clients’ interests first in all cases. Shifting your business model to an advice-based fee model now will help you get ahead of the curve should the fiduciary rule extend to remaining retirement assets. In addition, advisors who merely comply with the DOL fiduciary rule now will have an increasingly difficult time being a fiduciary on only qualified assets, and not a client’s entire portfolio.

How to Capitalize on the DOL Fiduciary Rule

The new DOL fiduciary rule is here! Are you prepared to handle the changes to your business model and the way you generate revenue? Learn from think2perform’s Doug Lennick how to create a competitive advantage from the DOL fiduciary rule by moving to a holistic practice with an advice-based fee model in this free download.

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