A Victory for Trust, Transparency and Accountability

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Published by Ron Carson | @RCHusker

Many financial advisors are worried about the new Department of Labor (DOL) rule requiring them to put their clients’ interests above their own financial gain when offering individual retirement advice. One big concern is that compliance will be burdensome, particularly for small firms without a large internal team to handle it.

Good advisors should, in fact, be applauding these changes. Yes, there will be compliance costs, but the DOL’s rule could be the best thing that has happened to honest firms in years.

Currently, many advisors in our profession have been getting away with providing little real value to their clients while overcharging them considerably. And they aren’t breaking any rules by doing this. Under the current system, advisors are only obligated to recommend “suitable” investments to clients. That means they are free to recommend less-than-ideal funds on which they earn a high commission or extra fees. Many investors don’t realize how much they are paying, because these charges are buried inside unreadable prospectuses and, in some cases, inside a “statement of additional risk” that the investors have to request.

Under the new rule, which will start to phase in gradually in 2017 and be fully effective in 2018, advisors who have focused on trust, transparency and accountability and put their clients’ needs first will have a strong competitive edge.

But they will have to invest more in their businesses to make the most of this advantage and show they are performing as advertised. At a minimum, every advisor will need to build a digital platform—or plug into one—that allows investors to interact with their firm any way the customers want. All financial advisory firms must be prepared to serve clients entirely through digital means, or they will lose ground to “roboadvisors.”

Although I run a substantial-sized firm, we didn’t have the scale to create such a platform for ourselves, so in 2012, I formed Carson Group Partners, a group of like-minded advisors, who were willing to build one together. My firm reinvested much of its earnings into creating our technology platform the past few years.

As you might assume, making investments like this can lead to lower profits. The truth is, margins are going to have to come down in this business. Wealth management firms should not be aiming for the 60% or 70% profit margins I have heard some advisors bragging about. If your margins are that high, you are not reinvesting enough money in your business.

As I discussed in The Sustainable Edge, my recent book with Scott Ford, wealth management firms should be aiming for responsible margins, not the highest ones possible. Our margins shouldn’t be so low that we are at risk of going out of business, which won’t help our customers any, but they should reflect a proper amount of investment in our internal stakeholders and our clients. We can offset some of the costs of this investment through the productivity gains that technology brings.

As we reinvest, we will need to find new ways to bring value to our clients beyond a doubt. Firms that use an integrated, holistic approach to advising customers on their finances will have tremendous opportunity to grow in this new environment—provided they influence their investors’ behavior in way that moves the needle on their returns. However, the value they offer must go well beyond the performance of their investments. We need to take the gamble out of hitting financial milestones for our clients. If they want to have a wedding, pay for their children’s education or retire, they need to know the money will be there.

Some advisors are not thinking along these lines at all and are taking a “wait and see” attitude toward the new rule. That’s a big mistake. If you are an advisor who has the energy and desire to evolve your business, the opportunity for growth has never been greater—and the time to seize it is now. Investors have an insatiable appetite to work with advisors who sit on the same side of the table they do.

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