What This Means for Advisors and Broker-Dealers

Welcome to MutualFunds.com

Please help us personalize your experience and select the one that best describes you.

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission

We hope you enjoy your experience

Channels

Find the latest content and information here about the 2019 Charles Schwab Impact Conference.

Advisors

Receive email updates about fund flows, news, upcoming CE accredited webcasts from industry thought leaders and more.

Content focused on helping financial advisors build successful client relationships and grow their business.

Content geared towards helping financial advisors build better client portfolios.

Get insights on the industry trends and investment news from leading fund managers and experts.

What This Means for Advisors and Broker-Dealers

Fiduciary Duties
Under this new rule, any broker-dealer that hires financial professionals who work with qualified plans, like IRAs or 401(k)s, will be required to act as a fiduciary.
To act as a fiduciary, an advisor needs to act in the best interests of the client and put the client’s interest above his or her own interests. This rule also requires fiduciaries to disclose all fees to the client, even though they may be hidden in the investment prospectus.

This article will discuss the likely changes that both advisors and broker-dealers will need to make before the deadline and how those changes might impact target investors.

Financial Advisors Need to Provide a Fair Playground for Clients

Financial professionals and advisors are the most impacted by the new fiduciary rule. Many advisors never had to maintain this fiduciary status when it came to dealing with their clients and therefore need to adapt to the changes if they choose to continue to work with qualified plans.

The first step that financial advisors (FAs) are taking is converting all qualified commission-basis accounts to an advisory basis. The DOL believes that much of the conflict of interest that FAs face is the different level of commissions on investments. A-Share mutual funds, for example, have a high upfront sales charge along with an internal expense ratio. When compared to an exchange-traded fund (ETF), there is no sales charge outside of a commission and a much lower expense ratio. The DOL wants FAs to select only the most appropriate investment for their clients, regardless of what they get paid as a fee. If both these options were available to an advisory account, the only comparisons should be the expense ratios and the investment returns. Check out the cost considerations of mutual funds when compared to ETFs.

If the rule is implemented, clients that want to remain in a commission-based account will be required to sign a Best Interest Contract Exemption (BICE) form. However, this contract does not necessarily mean that any investment can be bought or sold in the account without justification and FAs will need to heavily document client conversations.

Impact on Traditional Commission-Based Strategy

Broker-dealers (BDs) – the firms that employ FAs – are also facing the wrath of the new DOL ruling. BDs are now employing systems for their FAs to succeed with these new changes that require them to be fiduciaries.

The first step in this process is to ensure that each client’s financial objectives, goals and risk tolerance are aligned with their current investments. If a client has “conservative income” as their investment objective, his or her account should only have cash and fixed-income investments. Heavy exposure to stock or other investments would not align with the investment objective and leave both the FA and BD possibly liable for not acting in their fiduciary capacity.

To help mitigate these risks, BDs need to ensure that a client’s goals are better aligned to the investment strategy. BDs have begun to help their financial advisors develop a systematic approach of aligning their client’s financial goals with their investment advice before the April deadline. Advisors are required to meet and review all of their client’s investment accounts in an effort to ensure the accuracy of the firm’s financial information.

Transition of Advisory Role to a Financial Planning Role

Over the past few years, the financial advisory industry has begun to see a major transition from the prototypical “stockbroker,” who gives direction on what to buy and sell, to more of a comprehensive financial planner.

FAs who obtained the Certified Financial Planner (CFP) designation are already accustomed to the fiduciary rule, as it is required to act in the best interest of the client if you hold the CFP designation. The DOL is looking for FAs to provide more comprehensive financial planning advice to their clients in exchange for higher fees. Otherwise, the DOL does not see value in an advisor who merely charges for transactions.

Impact on Mutual Fund Issuers

Investments will also be impacted by the rule due to the fee concerns. As a fiduciary, an FA will need to research not only the performance of an investment, but the internal expenses. For instance, mutual funds with higher expense ratios (consider DCPEX) will have trouble getting new assets if an FA fails to justify the higher expense.

On the other hand, ETFs that have much lower expenses (consider VOO) are gaining more and more popularity. Many fund companies will be forced to either close non-performing funds or drastically reduce their expense ratios just to stay relevant in an ever more fee-conscious environment. You can read the reasons why FAs might choose mutual funds.

The Bottom Line

If implemented, the DOL rule will greatly impact anyone who wants to remain in the financial advisory industry working with qualified plans. However, in the end it is the clients who stand to benefit, despite the tedious changes that the industry has to make to comply with the new ruling.

Consider this: acting as fiduciaries, FAs will give completely objective advice free of any conflicts of interest. Clients will get an investment choice that based on their specific needs, and not on an advisor attempting to generate a higher commission.

You can track our News section to keep a track of the latest happenings in the mutual fund industry.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next

Fiduciary Duties

What This Means for Advisors and Broker-Dealers

Under this new rule, any broker-dealer that hires financial professionals who work with qualified plans, like IRAs or 401(k)s, will be required to act as a fiduciary.
To act as a fiduciary, an advisor needs to act in the best interests of the client and put the client’s interest above his or her own interests. This rule also requires fiduciaries to disclose all fees to the client, even though they may be hidden in the investment prospectus.

This article will discuss the likely changes that both advisors and broker-dealers will need to make before the deadline and how those changes might impact target investors.

Financial Advisors Need to Provide a Fair Playground for Clients

Financial professionals and advisors are the most impacted by the new fiduciary rule. Many advisors never had to maintain this fiduciary status when it came to dealing with their clients and therefore need to adapt to the changes if they choose to continue to work with qualified plans.

The first step that financial advisors (FAs) are taking is converting all qualified commission-basis accounts to an advisory basis. The DOL believes that much of the conflict of interest that FAs face is the different level of commissions on investments. A-Share mutual funds, for example, have a high upfront sales charge along with an internal expense ratio. When compared to an exchange-traded fund (ETF), there is no sales charge outside of a commission and a much lower expense ratio. The DOL wants FAs to select only the most appropriate investment for their clients, regardless of what they get paid as a fee. If both these options were available to an advisory account, the only comparisons should be the expense ratios and the investment returns. Check out the cost considerations of mutual funds when compared to ETFs.

If the rule is implemented, clients that want to remain in a commission-based account will be required to sign a Best Interest Contract Exemption (BICE) form. However, this contract does not necessarily mean that any investment can be bought or sold in the account without justification and FAs will need to heavily document client conversations.

Impact on Traditional Commission-Based Strategy

Broker-dealers (BDs) – the firms that employ FAs – are also facing the wrath of the new DOL ruling. BDs are now employing systems for their FAs to succeed with these new changes that require them to be fiduciaries.

The first step in this process is to ensure that each client’s financial objectives, goals and risk tolerance are aligned with their current investments. If a client has “conservative income” as their investment objective, his or her account should only have cash and fixed-income investments. Heavy exposure to stock or other investments would not align with the investment objective and leave both the FA and BD possibly liable for not acting in their fiduciary capacity.

To help mitigate these risks, BDs need to ensure that a client’s goals are better aligned to the investment strategy. BDs have begun to help their financial advisors develop a systematic approach of aligning their client’s financial goals with their investment advice before the April deadline. Advisors are required to meet and review all of their client’s investment accounts in an effort to ensure the accuracy of the firm’s financial information.

Transition of Advisory Role to a Financial Planning Role

Over the past few years, the financial advisory industry has begun to see a major transition from the prototypical “stockbroker,” who gives direction on what to buy and sell, to more of a comprehensive financial planner.

FAs who obtained the Certified Financial Planner (CFP) designation are already accustomed to the fiduciary rule, as it is required to act in the best interest of the client if you hold the CFP designation. The DOL is looking for FAs to provide more comprehensive financial planning advice to their clients in exchange for higher fees. Otherwise, the DOL does not see value in an advisor who merely charges for transactions.

Impact on Mutual Fund Issuers

Investments will also be impacted by the rule due to the fee concerns. As a fiduciary, an FA will need to research not only the performance of an investment, but the internal expenses. For instance, mutual funds with higher expense ratios (consider DCPEX) will have trouble getting new assets if an FA fails to justify the higher expense.

On the other hand, ETFs that have much lower expenses (consider VOO) are gaining more and more popularity. Many fund companies will be forced to either close non-performing funds or drastically reduce their expense ratios just to stay relevant in an ever more fee-conscious environment. You can read the reasons why FAs might choose mutual funds.

The Bottom Line

If implemented, the DOL rule will greatly impact anyone who wants to remain in the financial advisory industry working with qualified plans. However, in the end it is the clients who stand to benefit, despite the tedious changes that the industry has to make to comply with the new ruling.

Consider this: acting as fiduciaries, FAs will give completely objective advice free of any conflicts of interest. Clients will get an investment choice that based on their specific needs, and not on an advisor attempting to generate a higher commission.

You can track our News section to keep a track of the latest happenings in the mutual fund industry.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next