AmygDOLa – How are you wired to react to the looming DOL rule threat?

The amygdala is part of the limbic system of the brain, which is responsible for emotions, survival instincts, and memory. In particular, this area of the brain coordinates our instinctive “fight or flight” response to a perceived threat, playing a critical role in survival.

The DOL fiduciary rule is currently one of the largest potential threats to advisor survival. It doesn’t help that the timing of the rule’s roll-out is colliding with what is arguably the most disruptive moment in financial services industry. Robo-advisors, fee pressures, technology integration, and other market forces were already under way before the DOL rule became front page news.

Although this tidal wave of regulatory change is upon us, in many ways, it feels as if it snuck up on the industry by surprise. In February 2016, less than two months before the final DOL rule was released, we surveyed advisors on the following question:

“If it passes, to what degree do you see the DOL proposal impacting your business?”

At the time, 61% of advisors reported they expected “slight” to “no” impact.

Potential impact of porposed DOL Fiduciary Standard

Source: Russell Investments, February 2016.

The curve is shifting

Over the past nearly 20 years, Russell Investments has worked with thousands of advisors through our practice management coaching programs. It’s reasonable to assume that our advisor sample is like any other: the “success” of the advisors who have participated in our programs is normally distributed. In that case,

  • The left-hand side of the curve would be populated by that small group of advisors who weren’t engaged during the program and hence experience zero change in their business.
  • The right-hand side of the curve would represent the other small group of advisors who implemented the majority of the curriculum and as a result achieved high levels of growth
  • The middle of the curve would house the majority group of advisors who implemented only some of strategies and subsequently experienced moderate incremental growth.

But, we believe that the bell curve is going to shift as a result of the changes the advisory industry is undergoing:

  • Advisors currently on the left side of the curve will either choose to leave the industry – or they will be forced out.
  • The “average” advisor currently in the center of the curve will shift to the left.

Essentially, the requirements for being a top-performing advisor are increasing above historical industry standards. This trend occurs in every industry – financial services is not immune to it. However, the advisory industry is exceptional in that the short implementation timeline outlined by the DOL rule makes this shift of the curve immediate and abrupt.

Advisor curve

For illustrative purposes only.

The amygdala response

With the clock ticking on the April 2017 and January 2018 DOL rule implementation deadlines, many advisors are experiencing their amygdala’s threat-response being triggered. Depending on the advisor, that instinctive reaction is likely to take one of three forms:

  • Freeze. Despite the overwhelming news coverage on the DOL rule, many advisors are stuck in a catatonic state. The range of emotions in this group varies from denial to an optimistic hope that the national political climate might cause the rule to be reversed. But regardless of the advisor’s attempt to rationalize their inaction, the end result will likely be a material decline in their competitive position versus industry peers who are already taking action.
  • Flight. Fidelity recently reported in a September survey of advisors that 10% of respondents said they are planning to leave or retire from the field earlier than they expected because of the rule, while another 18% said they are “reconsidering their careers as advisors.”[1] In sum total, that means a staggering 28% of advisors are considering exiting the industry. As the implications of the DOL rule and range of market forces hit the industry, these advisors are looking at the exit as a viable option. In some respects, the 28% estimate may in fact be conservative because it doesn’t yet account for those advisors who are currently in “freeze” mode and may still conclude that the requirements of running an advisory business are no longer economically feasible or of interest to them.
  • Fight. These advisors likely have recognized three important things:
    1. This confluence of industry changes is an opportunity
    2. Many of the strategies necessary for success are familiar: they are the “best practices” that have been around for decades.
    3. The winning mindset is that “Defense is the best offense.” Defensively, advisors will need to implement these best practices to survive the regulatory and market forces. Those businesses that embrace and implement the best practices properly are most likely to have a solid foundation in place for continued growth… towards the right-hand size of the shifting curve.

But, the most important question is: What is YOUR amygDOLa response?

The bottom line

The combined pressures of the DOL rule and shifting competitive forces, are triggering extreme amygdala responses for many advisors. If your amygDOLa is triggering a FIGHT response, our nearly 20 years of experience working with advisors to help build sustainable businesses would encourage you to focus your fight on the Four Pillars of a Sustainable Advisory Business.

Four Pillars of a Sustainable Advisory Business.

[1] Source: http://www.fa-mag.com/news/have-advisors-learned-to-stop-worrying-and-love-the-dol-rule-29164.html

Disclosures:

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

The Russell logo is a trademark and service mark of Russell Investments.

Copyright © Russell Investments 2016. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments.

RIFIS: 17951

 

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