Honest Financial Advisors Should Embrace New DOL Rule

CNBC Commentary by Ron Carson, Founder and CEO of Carson Wealth Management Group

The financial advisory world has always been opaque. Hidden in the fine print of many a prospectus are steep fees and commissions that have kept unsuspecting, everyday investors from maximizing their returns. 

Fees are an unavoidable evil of investing, but that doesn’t mean investors have to overpay when it comes to them. Few people pay much attention and just don’t realize how those fees can eat away at your portfolio.

Some slick advisors have taken advantage of the situation for years, leaving transparent firms at a disadvantage.

That is why honest firms should welcome the new Department of Labor rule requiring advisors to put their clients’ interests above their own financial gain when offering individual retirement advice. The sweeping change could affect about $3 trillion in client assets and $19 billion in revenue at full-service wealth management firms, according to Morningstar.

Advisors are right now free to nudge clients toward low-performing funds on which they earn a high commission or extra fees — without violating any rules. Under the existing system, advisors are only obligated to recommend “suitable” investments to clients for their retirement portfolios.

Many investors don’t realize how much they are paying, because these charges are buried inside a “statement of additional risk” that they have to request.

Under the new rule, which will start to phase in gradually in 2017 and be fully effective in 2018, advisors who have focused on trust, transparency and accountability and put their clients’ needs first will have a strong competitive edge.

In addition to shouldering higher compliance costs, these advisors will have to invest more in their businesses to make the most of this advantage and show they are performing as advertised. At a minimum, every advisor will need to build a digital platform — or plug into one — that allows investors to interact with their firm any way the customers want. All financial advisory firms must be prepared to serve clients entirely through digital means or they will lose ground to robo-advisors.

Savvy financial advisory firms will find ways to reinvest earnings into creating a technology platform. Of course, making investments like this can lead to lower profits.

The truth is, margins are going to have to come down in this business. Wealth management firms should not be aiming for the 60 percent or 70 percent profit margins. If an advisory firms’ margins are that high, they are not reinvesting enough money in their business.

As I discussed in “The Sustainable Edge,” my recent book with Scott Ford, wealth management firms should be aiming for responsible margins, not the highest ones possible.

Our margins shouldn’t be so low that we are at risk of going out of business, which won’t help our customers any, but they should reflect a proper amount of investment in our internal team and our customers. We can offset some of the costs of this investment through the productivity gains that technology brings.

As we reinvest, we will need to find new ways to bring value to our clients beyond a doubt. Firms that use an integrated, holistic approach to advising customers on their finances will have tremendous opportunity to grow in this new environment — provided they influence their investors’ behavior in way that moves the needle on their returns.

However, the value they offer must go well beyond the performance of their investments. We need to take the gamble out of hitting financial milestones for our clients. If they want to have a wedding, pay for their children’s education or retire, they need to know the money will be there.

Some advisors are not thinking along these lines at all and are taking a “wait and see” attitude toward the new rule.

That’s a big mistake. If you are an advisor who has the energy and desire to evolve your business, the opportunity for growth has never been greater — and the time to seize it is now. Investors have an insatiable appetite to work with advisors who have their best interests in mind.


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