One of the biggest risks to financial services firms as a result of the Department of Labor’s fiduciary standard is advisor attrition. Perhaps it’s not surprising given the ruling is considered to be one of the greatest regulatory changes the U.S. Financial Services industry has ever experienced. U.S. firms will need to find a new strategy to best manage this risk and ensure advisor retention and successful recruitment. One unlikely place for firms to start, is examining how their peers in the UK weathered a similar regulation a decade ago. Taking a look at what worked and what didn’t from across the pond can help firms in the U.S as they move forward on their DOL implementation journey, and aim to achieve the best possible outcomes for their firms, advisors and clients.
For those not familiar, the Retail Distribution Review (RDR) was launched in the UK by the Financial Services Authority, the predecessor body of the Financial Conduct Authority (FCA) in 2006. The rules aimed to make the retail investment market work better for consumers. Britain made three important changes to the financial advisory landscape as part of the RDR: 1) Commissions were banned; 2) Advisors and their advice were placed into two categories: independent and restricted; 3) The FCA raised the bar in terms of qualifications necessary to be licensed as a financial adviser. So, what were the results? In the UK, RDR created an advice gap with those of middle or modest income, and there was an increase in number of advisors with higher numbers exiting from banks and savings and loan societies.
Although we don’t know the exact long-term impact the DOL ruling will have in the U.S., it’s strongly predicted that advisors who are close to or of retirement age will choose to retire instead of making the changes (much like in the UK). Because of this, recruiting in the U.S. will heat up pre-DOL implementation and firms will focus on advisors who are fee-based.
Moving forward, small to mid-size firms in the U.S. will need to have a strong DOL strategy and advisor retention processes and value propositions in place, as losing even one or two key advisors could have a significantly negative impact on them. As part of this strategy, advisors will also need to learn how to partner with automated advice solutions, as the advice gap is also predicted to occur in the States, and auto-advisors will continue to increase in popularity, much like it did in the UK.
The biggest questions firms should be asking as it relates to their advisors is:
- Am I confident that my advisors know how to have a comfortable and confident conversation with clients/prospects about the new fiduciary standards?
- How will my advisors be personally impacted in their practice management?
- How do I best equip my advisor so that they have the resources they need to navigate difficult conversations?
- What training considerations do I need to implement for new advisors?
No matter where firms are on their DOL implementation journey, learning from the UK’s RDR experience and digging deeper into the above questions are two good places to start.