by Rod Bristow
While on a trip to the US recently I had the opportunity to catch up with a group of peers from around the world. We got to talking about the advice, asset management and technology industries in the United States and the impact of regulation– particularly the Department of Labor’s fiduciary rule. This requires financial advisers to act in their clients’ best interests with retirement planning and assets and to be transparent with their fees and incentives. It’s a rule that was initially shelved by President Donald Trump, but will now come into effect partially from early June, and fully from January next year.
I wanted to get a better understanding of what might happen once this law came into effect, particularly given that there is no regulatory body enforcing the rules. This means litigation will be the decider of who was right or wrong.
Similar to the Australian Dealer Group (AFSL) model, the United States’ Broker-Dealer model sees advisers run their own businesses, leveraging software, support and other systems from a Broker-Dealer to operate.
Compliance with the new fiduciary rule rests with both parties. With the potential for significant litigation against any number of advisers under them, Broker-Dealers will likely require their advisers to use a uniform set of systems and tools to better manage risk. This may include systems that are integrated across the Advice value chain including client engagement, customer relationship management and investment management. The latter is particularly important here, considering the risks of advisers running discretionary portfolios for clients in consistently demonstrating client best interest.
My fellow Broker-Dealer CEOs clearly understand these issues and are considering a number of strategies to manage them. Some of the solutions we discussed ranged from quality software and advice process support technology right through to third-party constructed model portfolios for clients. A consistent theme was the requirement for training and change management with advisers in how to comply with the new rules.
Interestingly, there was the perception of ‘first mover disadvantage’ by some of my US-based peers when it comes to compliance. When I queried this, it seems that, like Australia, there are low barriers to advisers changing Broker Dealers. By hastily tightening compliance or asking advisers to provide advice in a different way, it was thought advisers might switch to a competitor and damage their business models.
This concept sparked a robust debate, and we never fully reached a resolution on whether the advisers who don’t want to comply with the new rules would represent those that the Broker-Dealer would actually want to retain. It’s certainly something to consider with the (very real) risk of class action from clients who may dispute whether advisers have acted in their best interests.
From our discussions, it’s clear to me that the CEOs I spoke with are incredibly passionate and committed to a future industry that is sustainable and supportive of the clients’ best interest.
On a final note, it’s good to see some positive reform from the Trump administration – even though this reform was ‘in flight’ from the previous administration. That’s right, I used ‘positive’ and ‘Trump’ in the same sentence (a stretch but I got there…). I’ll be keenly watching to see how the rollout of this law affects the industry and look forward to the next robust discussion with my U.S. counterparts!
Managing Director and CEO