By: John P. Napolitano, CFP®, CPA, PFS, MST

Like everything else in our world, change is about to happen both more quickly and more frequently in the wealth management world. Those who adapt will survive, perhaps even thrive, under the changes ahead.


THE FIDUCIARY RULE

Stealing most of the headlines in 2016 was news about the Department of Labor’s fiduciary rule. This ruling is a big deal for the profession. The primary intent of this bill was to have brokers — a.k.a., financial professionals who earn their income via commissions — provide lower-cost products and services for their clients’ retirement accounts. The rule is complex, with an entire set of workarounds for those still living in the commission-based world. The rule, however, impacts investment advisors as well. Even if you are a fee-only practitioner, there are aspects of this bill that will apply to your practice. Issues such as choice of custodian, fees charged by custodians for trading or account servicing, share class in the case of mutual funds, and documenting any such decisions are just a few of the areas to be concerned about.

While there are rumors circulating about what the new administration may do to the rule, do not plan on its complete demise. The principles behind the fiduciary rule are well founded, and someday this rule requiring fiduciary behavior will extend to all of the work performed by an advisor.

In fact, I believe that the DOL has awakened other branches of regulatory oversight, forcing them to also address the issue. The Securities and Exchange Commission has been somewhat silent, but I believe that the DOL rule has indirectly sent a message to other regulators that better regulation of financial advisors is needed. The crux of the issue is this: Are you my advisor, confidant, fiduciary working on my behalf? Or are you a broker, without the requirement to act in the clients’ best interests? For me, I prefer a clear line between brokers and those qualified and willing to be a true fiduciary advisor to the client. A better fiduciary rule would apply to all of an advisor’s dealings with a client, and not just their retirement holdings.

ROBO ADVISORS

A close second in the headlines about emerging trends is the emergence of robo advisors. Like it or not, robo advisors are here to stay and I believe that they can help both advisors and our clients. My only problem with the robo advisor is the name. The robo platforms currently available are not advisors, they are investment platforms. A better name would be “robo investors.”

Of course, some robos will incorporate some planning intelligence and other artificial intelligence to assist with planning decisions — but today that is not the case. Today, a robo cannot replace the great work that a wealth manager can do with challenging personal issues. In fact, some robo advisor platforms have already begun the process of humanizing their services. These firms have hired trained financial professionals to offer services beyond asset allocation and asset management. These human beings can prepare a comprehensive financial plan, talk to their clients, and offer advice.

What robo advisors have also done is to allow capitalism to strike with regard to asset management pricing. Fees for asset management are dropping, and unless your performance is off-the-charts amazing, you will lose the price and performance discussion as robos become more ubiquitous. The fees that robo platforms charge for asset management range from about 20 basis points to a high of 50 basis points. What will be required to maintain the premium pricing charged by most wealth management firms is just that — wealth management.

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