In an uncertain DOL environment, a potential implementation path for advisors

DOL preparedness, now or later

The major regulatory (DOL), demographic and technology changes confronting financial services won’t spare a single part of the industry’s supply chain. The question is, how should advisors best respond in order to survive in the short term and thrive in the long term?

Since December 2015, we have touted the Four Pillars of a Sustainable Enterprise in response to these currents of change.

Pillar #1: Manageable number of client households

Pillar #2: Product inventory control

Pillar #3: Documentation of key processes

Pillar #4: Optimized client experience

In recent months, as key industry stakeholders have begun retooling their strategic vision and the day-to-day functions of their businesses, we anticipate three trends emerging that will have direct implications for financial advisors:

  • Increased liability. The proposed DOL rule represents an immediate increase in the liability associated with being a financial advisor. Depending on the situation, the liability may come in the form of fines, litigation and even enterprise closure.
  • Accelerating margin compression. In the medium term, the DOL and technology competition (e.g., robo-advice) are putting pressure on fees. At the same time, costs are increasing, so many advisory firms’ margins are being squeezed, which jeopardizes the long-term viability of an advisory firm.
  • Increasing need for competitive differentiation. Technology and public perception are putting pressure on financial advisors to differentiate themselves. As consumers become accustomed to the unique and customized experiences routinely delivered outside of the financial services realm, they will come to expect a similarly personalized level of service and experience from their advisor, too.

The key to long-term success for advisors will be to address these trends in such a way that prioritizes advisor survival in the near-term and strategic differentiation in the longer term. The Four Pillars can help in that regard, because they each align with the trends:

The 4 Pillars

Developing a sequenced response to the changing advisory landscape

In terms of which trend advisors should consider addressing first, we believe that the increased liability is the most near-term threat – both from a timing and a scale of enterprise risk perspective. So advisors should consider addressing that challenge first – via Pillar #3 – before tackling the implications of margin compression (via pillars #1 and #2), and finally competitive differentiation (via Pillar #4). The following is a sequenced implementation for consideration:

First, tackle Pillar #3 – Documentation of key processes

Having comprehensive and tangible operations manual that documents the key processes that an advisory firm executes in order to act in the client’s best interests can help advisors address the increased risk of liability under the DOL rule. However, even without the DOL rule, this sort of documentation is beneficial as it can help reduce the number of errors, provide personnel with valuable role clarity and potentially enhance the valuation of the advisory firm.

Second, undertake Pillar #1 – Manageable number of client households – and Pillar #2 – Product inventory control

By consciously managing the number of client households they work with and being selective about the number of products used in their business, advisors have the ability to address margin compression through the key variables that drive profitability and are within the advisor’s control.

Third, address Pillar #4 – Optimized client experience

Focusing resources on developing deeper client relationships and delivering corresponding value can allow for true competitive differentiation.

Get started: Assess your level of preparedness for Pillar #3 – Documentation of key processes

To help you gauge where you currently stand in terms of implementing Pillar #3, consider the following questions:

  • Do you have a written plan that takes into account each client’s goals, circumstances and preferences?
  • Do you document how your investment selections align with every client’s plan?
  • Have you documented the workflows that lead to strong client relationships?
  • Do you have written documentation of key processes that align with your home office policy and support your client service model?
  • Is there role clarity among all members of your team?

If you find yourself answering “no” to any of these questions, then you likely have some work to do. We’re here to help.

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 Group, LLC 2017. 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 18234

  1. No comments yet.

Millennials are the future.
Engage them now.

Millennial InvestorSubscribe to the Helping Advisors Blog and receive a free copy of the Millennial Investor.

We will only use your email for Helping Advisors Blog updates.