The DOL took aim at the retirement segment of the market, introducing rules intended to take effect in April, 2017. They see a conflict of interest between advisors seeking to maximize revenue and clients seeking to minimize fees. Since one person can’t serve two masters, they’ve decided those who invest a client’s retirement assets should be held to the stricter fiduciary standard.

What does this mean for financial services firms?

If you work for a large organization, regardless of industry, you know they want to quantify risk and avoid it as best they can. The Deepwater Horizon disaster is an example where everything goes wrong and the liability is almost open-ended.

Financial services companies employ many financial advisors who each work with fewer than 100 to several hundred clients per advisor. The new DOL rule opens the door to lawsuits. A client might accuse their financial advisor of not living up to the fiduciary standard and acting in the client’s best interests.

Since the ruling is new, no one knows how the courts might rule. Large companies often delay taking action until they know the answer. For example, electronic signature technology appeared in the mid 1990s, however, it wasn’t until 1999 that the Uniform Electronic Transactions Act appeared. Once companies had the green light and those electronic signatures were legally binding, they went into widespread use.

What will financial services firms do in the meantime? Logically, they will anticipate the rule affecting retirement assets will eventually apply to all investment accounts.

• First, they quantify the risk. They have advisors. They have many smaller accounts and proportionately fewer larger accounts. They know advisors can only actively monitor a finite number of accounts.
• Next, they consider the liability. If a client buys individual stocks and loses money as a result of neglect on the part of the advisor, there might be a fiduciary issue. Paying attention is part of acting in the client’s best interests. Someone needs to drive the bus.
• Can they insure against the risk? It’s unlikely any insurance company would write this type of protection. Too many moving parts.
• Can they avoid the risk? If all clients complete a financial plan that delivers a risk tolerance level as part of its output, the firm can assign a corresponding asset allocation. The client’s portfolio can be built using mutual funds, exchange traded funds (ETFs) and professional money management suggested within each of the asset classes. Fees can be standardized across the board, perhaps at an annual rate of 1percent of assets under management.
• Can they outsource risk? Smaller accounts present a risk because there are so many of them. They might be transitioned onto a robo-advisor platform which automatically rebalances the asset allocation when the market moves. This platform might concentrate on using exchange traded funds or index funds to minimize client costs and standardize the returns.

What does this mean for clients?

If you are a self-directed investor who trades online, the DOL rule probably has little impact. If you work with a financial advisor who functions as an order taker, they will likely put in place some paperwork confirming you are acting under only your own ideas.

However, according to The Economist, 80 percent of American investors pay for financial advice. It’s likely large firms are going to attempt to define their own standard of what good service means in terms of frequency of written, verbal, face-to-face and electronic contact. They will probably keep great records through saleforce.com or other customer relationship management (CRM) tools. They will likely report to clients periodically the number and nature of outreach contacts they have initiated.

For clients working with financial advisors, there will likely be a major move towards fee-based pricing. Transaction-based pricing will likely disappear. Under the new format, everything will cost essentially the same in fees. When the advisor needs to act in the client’s best interests regarding getting the best pricing possible, it’s a lot easier when everything on offer costs about the same.

How will my relationship change?

If you trade stocks on your own, not much is likely to change. You might have more paperwork spelling out that you are assuming all the risks. If you have a smaller account and work with a financial advisor, it will likely be suggested you migrate to a managed account or a robo-advisor platform at the same firm. If you have a larger account and aren’t involved in the day-to-day decision making, you have likely already transitioned to a platform of professional money managers, mutual funds or exchange-traded funds (ETFs) with asset-based pricing.

However, if you trade individual stocks on a regular basis and act on your financial advisor’s suggestions, its likely there is going to be a lot more documentation of fees paid along with your awareness and approval at each level. This is another example where a pricing model where fees are based on assets, not the number of transactions, might be implemented. Firms will try to define a standard for fiduciary behavior, another for fee transparency and share the liability with clients as best they can.

In conclusion, you can’t legislate morality. Honest, ethical financial advisors have acted in their client’s best interests for years. Yes, the suitability standard might not be as binding as the fiduciary stands, but those advisors realized satisfied clients stay and unhappy clients vote with their feet.