Part 1: "Who Moved My Cheese?" - Transformation is Coming [The Future of Financial Advice]

Change happens. In the classic 1998 book, Who Moved My Cheese?, a motivational tale by Spencer Johnson, two mice (Sniff and Scurry) have anticipated and prepared for change, and they quickly move on to find new cheese after the source of cheese for many years disappear. But two other characters (Hem and Haw) don't anticipate the change and wrestle with the fact that their cheese is no longer present. Over time, Haw puts "the handwriting on the wall" as he writes:

• "If You Do Not Change, You Can Become Extinct"
• "What Would You Do If You Weren't Afraid?"
• "When you move beyond your fear, you feel free."

Of course, there is much more to the story, and to this short book (still in publication today), and the short related movie, which can be found on YouTube. The power of this book to facilitate transformation within an organization is readily apparent. As companies and firms go through change, many, many managers have often purchased this book and provided it to each and every one of their employees.

Perhaps we should now provide this book to the majority of the financial services industry - life/annuity insurance agents, registered representatives, dual registrants, asset managers, life/health insurance companies, and - eventually, investment bankers. And perhaps the persons that need it the most are some of the C suite executives in financial services firms. For change is likely coming, and this transformation is likely to occur faster than many might appreciate.

Status of DOL Fiduciary Rule-making.

The U.S. Department of Labor's "Conflict of Interest" (fiduciary) rule was re-proposed in April 2015, had two comment periods, and was the subject of four days of DOL hearings. The DOL's rule, with some changes to the April 2015 proposal, appears headed toward being promulgated as a final rule sometime in early 2016, with an implementation date for many of its provisions likely be the end of 2016.

Having survived the best opportunity its opponents possessed to stop the rule (a proposed rider to the Omnibus Bill on the budget in Dec. 2015), the DOL's fiduciary rule now stands an excellent chance of being finalized. There simply is no need for the current Administration, which has made the DOL's fiduciary rule a priority, to compromise and back down. And it is unlikely that those who oppose the bill will convince (through a continued huge lobbying effort, the likes of which has seldom been seen on Capitol Hill) enough U.S. Senators to join with the House and override a Presidential veto.

While legislation will likely be introduced in the U.S. Congress (as it already has been) to attempt to delay or stop the DOL's rule-making process, perhaps the biggest future challenge to the DOL's rule may appear in 2017 - if a Republican President is elected. Recall that an earlier change to DOL's rules, enacted by the Bush Administration, which would have been effective in early 2009, was suspended by the new Obama Administration shortly after it took office. A similar shifting of White House control (and, hence, control over the DOL) from Democratic to Republican hands could result in a swift repeal of the DOL's Conflict of Interest Rule, even if it had been in force for several weeks or a couple of months before the new Administration takes office.

Impact of the DOL's Rule: DC Plans, IRAs, and More.

The DOL's Final Rule will change the standards of conduct not only for many of those who currently provide advice to ERISA-governed retirement plan sponsors, but also to plan participants and IRA account owners.

What is the potential scope of this impact? According to the Investment Company Institute, total retirement plan assets (excluding annuity reserves) in defined benefit, defined contribution, and IRA accounts totaled $21.6 trillion at the end of the 3rd quarter of 2015. The total of Americans' personal investment accounts was, in contrast, about $54 trillion dollars (excluding bank deposits) at the end of the third quarter, according to the Federal Reserve. While other non-personally held investment assets exist, still one might conclude that 30% to 40% of publicly traded investments will be subject to the DOL's fiduciary requirements, if not even more.

The impact of the DOL's rule may be far greater. Expect the SEC to consider exercising its authority under Section 913 of the Dodd Frank and promulgate a fiduciary standard of conduct for brokers who provide personalized investment advice to retail consumers. Such a rule may take years to emerge from the SEC, but it likely will emerge eventually.

More and More Organizations Support Professional Standards.

Let's not forget the impact - past, present and future - of the Certified Financial Planner Board of Standards, Inc. and its 72,000+ certificates. Since its 2007 adoption of a fiduciary standard, the CFP Board has strongly advocated in support of the fiduciary standard, along with the other members of the Financial Planning Coalition. The CFP Board also recently announced a commission to review its standards of conduct. Many advocates for a true profession of financial planners hope that change will result in fiduciary standards being applied at all times to those who hold themselves out as CFP certificants, and to all financial and investment advice provided by those certificates (without any of the current exemptions for those providing only discrete advice in one area of financial planning). The CFP Board also continues to advocate for regulation of financial planning as a profession.

The CFA Institute also has moved to more fully embrace a professional standard of conduct for its members. It's CEO, CEO Paul Smith, has written on the need for a clear and consistent fiduciary duty for anyone providing personalized investment advice to clients.

The American Institute of Certified Public Accountants (AICPA)'s Personal Financial Planning Executive Committee issued a Statement on Standards in PFP Services as authoritative guidance for members who provided personal financial planning services to assist them in fulfilling their professional responsibilities. Many Certified Public Accountants hold the prestigious CPA/PFS designation.

"Fiduciary" Advice is Prevailing in the Consumer Marketplace.

Even without action by the DOL and SEC, or by the organizations listed above, fiduciaries are winning in the marketplace.

Greater market share is going to financial advisors who can claim membership in one or more of the fiduciaries-at-all-times organizations, such as the National Association of Personal Financial Advisors (NAPFA), the Garrett Planning Network (GPN), the Alliance of Comprehensive Advisors, and the XY Planning Network. Referrals to the members of these organizations continue to increase, in large part because the consumer press recommends the members of these organizations to the public. Because the members of these organizations all commit to "fee-only" practices, the public is assured that most of the conflicts of interest that so pervade financial services are avoided, thereby leading to extremely objective, trusted advice.

Still others are winning in the marketplace by the adoption of The Committee for the Fiduciary Standard's "Fiduciary Oath," formulated in major part and championed by a wise sage of financial planning, Harold Evensky. Consumers are increasingly asking their financial advisors to sign this document, or to incorporate it into their client services agreement. And if the financial advisor refuses to sign (or her or his firm refuses to permit her or him to sign), then consumers often depart for an advisor who will. Additionally, advisors who send out a letter (a sample letter can be found on the CFS web site) to their existing clients regarding their adoption of the Fiduciary Oath for their clients report a surge in referrals of new clients.

And, likely to have a substantial impact in the future are the "Best Practices" recently promulgated by The Institute for the Fiduciary Standard.

Market Share Changes: A Surge of Fiduciary Advice. 

In 2015 the Aite Group reported that the market share of wirehouses continues to decline, from 41.3% in 2007 to a projected 31.3% in 2018. The same report indicated that independent Registered Investment Adviser (RIA) firms will have seen their market share increase from 9.2% to 16% over the same time period.

Part of this market share increase, by independent RIA firms (who typically practice as fiduciaries), is due in no large part to their successful marketing efforts.

However, another large part is the movement of financial advisors out of wirehouses to independent broker-dealers, and from both wirehouses and independent broker-dealers to RIA firms. Advisors who have moved generally report higher levels of job satisfaction. They often cite as reasons for their move the "pressure to push proprietary products." Other advisors realized that the products their firm pushed provided incentive compensation to their firms (via payments for shelf space or other revenue-sharing arrangements), leading to conflicts of interest in their firm's due diligence efforts.

What about the movement of financial advisors from RIA firms to wirehouses? It rarely happens ... an indication that the business model of a fiduciary firm, committed to doing what is best for the clients, is highly attractive to individual financial advisors.

The market share of firms hides, to a degree, the movement away from product sales (commissions, 12b-1 shares) to fee-based accounts. Many of the wirehouse and independent broker-dealer firms possess dual registration which permits the use of fee-based accounts, and reports indicate a continued rise in the percentage of revenues from the assets-under-management fees of dual registrants as a percentage of total revenue.

Some Financial Services Firms are Slow to React to Change.

At a meeting of large financial services firms a few years ago, I was asked how the large firms could embrace fiduciary standards (as I had suggested to them) while still adhering to their fiduciary duty to their shareholders. My reply was straightforward ... "Continue down the path you are on and your firms will shrink. It is better to embrace change, and start the transformation now, while you have the resources to do so, than to try to make the change while under financial stress as a much smaller firm in the future."

Some financial services firms have reacted, and are changing their business models - particularly for newer advisors and advisory teams. Asset managers are increasingly rolling out new products designed to appeal to fiduciary advisors. But other firms have only given "lip service" to fiduciary, while the culture of the firm remains firmly rooted in sales. Other firms continue to deny the need for change.

Who Moved My Cheese? 

I've had several (usually older) advisors write to me, respectfully, to state that while they appreciate my views (which readers of this blog know are decidedly pro-fiduciary), that the change being asked is "too much" or "too fast." They state that their livelihoods are being jeopardized. And, in that regard, they are right. Within the next two years (with DOL rule making finalized), or over the next several years (as a result of marketplace forces), the old product-sales driven business model for retail financial services will likely see rapid decline.

Future Posts to Explore the Future of Financial Services.

In my next post(s) I'll explore the fiduciary standard of conduct. Understanding its roots, the proven relationship between fees and returns, and the key aspects of the fiduciary duty of loyalty, are essential if you are to transform your practice or firm to adapt to these changes.

I then explore the financial advisory firm of the future. What does it take for a firm and its advisors to comply with a fiduciary standard of conduct? How does adopting a fiduciary mindset affect the structure of the firm and its operations? What levels of product due diligence is required? Are fiduciaries required to recommend only index funds, as opposed to actively managed funds? How will these changes impact asset management firms and insurance companies (product providers)? How will advisor compensation practices be impacted, both as to fee arrangements with their clients and as to a firm's internal compensation practices? Who "owns" the client in the future?

Lastly, I'll delve into the financial advisory profession itself. Who will lead the profession ahead? How will it be regulated? What is the proper scope of regulation?

NEXT POST: "Who Moved My Cheese": The Future of Financial Advice (Part 2).

Ron A. Rhoades, JD, CFP^® is the Program Director for the Financial Planning Program and an Asst. Professor of Finance at Western Kentucky University, at its beautiful main campus in Bowling Green, KY. He is a CFP certificant, a regional board member of NAPFA, a consultant to the Garrett Planning Network, and a member of the Steering Group for The Committee for the Fiduciary Standard.

This blog represents Ron's personal views and is not necessarily indicative of the views of any institution, organization or firm with whom he may be associated.

Ron is scheduled to provide two presentations in early 2016 on the DOL's rules and the general impact of the fiduciary standard on the financial services industry:

• Feb. 24-25, 2016: FPA of Oregon and S.W. Washington Midwinter Conference 2016, where Ron will discuss: "The DOL's Transformational Conflict of Interest Rule"
• Feb. 26, 2016: FPA of Puget Sound's 2016 Annual Symposium, where Ron will discuss: "Reducing Your Risks in the New Fiduciary Era"

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Public comments to this blog are welcome, provided that no advertising occurs and that decorum is maintained. To reach Prof. Rhoades directly, please e-mail him at: Ron.Rhoades@WKU.edu. Thank you.