In recent years, more retail investors have started to make the distinction between a fiduciary duty and a suitability standard. This, of course, is due to the Department of Labor’s years-long effort to rewrite the rules for retirement accounts, which has gained attention from segments of the mainstream media that don’t typically cover our industry.
And while the recent DOL proposal seeking an 18-month implementation delay has spurred further speculation, that portion of the rules could get scrapped entirely, as the trends are pretty clear: Most clients want best-interest advice and will likely continue to press their advisors to continue to act as a fiduciary. So no matter what happens—whether the rule is fully implemented as scheduled at the top of next year, or gets delayed until July 2019 or is further modified—many advisors will have to make significant changes, including modifying the cost structure of their services.
Indeed, this environment—which also includes severe pricing pressure from automated online advice providers—has prompted many clients to question the fees they pay their advisors. But rather than view this industry flashpoint as an existential threat, you need to take this opportunity to make business model changes that will better position your practice for the future.
Here are four top ways to cope with increased pricing pressure in a world where fiduciary advice has become the expectation:
- Conduct an honest analysis of your practice. Take a hard look at the services you provide and determine where you are adding value. This can be a humbling exercise because, like most others, you take pride in your work and hate to think that you’re engaging in activities that don’t add value to clients. The reality, though, is often so different. Ultimately, this is about asking yourself one question: What about my practice is unique? If a competitor down the street or a robo are providing similar offerings—and doing it for less—you may not be creating as much value as you think.
- Move to phase out low-value offerings. Once you've identified services that are not differentiators, eliminate them or make them a secondary part of your practice and lower those fees. Across financial services, various tasks have become commoditized over the years, with asset management being the most obvious example. You may have a strong track record picking stocks and constructing investor portfolios, but if current and potential clients fail to prize those skills, because a digital platform or other third party is performing at a cheaper price, it doesn’t matter. The perception is that you are not adding value.
- Replace expendable services with more relevant functions. While the new landscape may force you to alter the delivery of certain services or drop some altogether, it will also present opportunities to add others that are more relevant in a fiduciary world. Estate planning is one good example. If this is currently not part of your practice, consider teaming up with an estate planning attorney. Another is offering family office-style services. This an area where many advisors over the years have created more value for clients, acting as their personal CFO and taking the lead in coordinating with lawyers, accountants and other providers to ensure that everyone is in the loop and on the same page.
- Be prepared to end some client relationships. Time has always been an advisor’s most valuable commodity. That’s especially true today. And because of that, there will be some clients for which your service model is no longer a good match. Undoubtedly, that could lead to some awkward and difficult conversations—especially in instances where there’s good personal chemistry—but the fact is that you have to devote more of your time to supporting high-value relationships.
While the final implementation phase of the fiduciary rule may be delayed—calling its future into question—every advisor needs to prepare to operate in a best-interest environment. That’s the expectation among retail investors. You can either bemoan this shift or look at it as an opportunity to grow. The decision is yours.
Kiliaen Ludlow is Senior Vice President of Relationship Management at Triad Advisors, the Atlanta-based, hybrid advisor-focused independent broker-dealer.