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The future of financial planning through fiduciary lenses

There will be a variety of desired and unexpected consequences of the DOL fiduciary rule

Dec 9, 2016 @ 10:39 am

By Jamie Hopkins and Craig Lemoine

Soon we will see 2017. And with the New Year comes a countdown to April 10. On that day the profession will unite under one fiduciary banner which will include acting with prudence and objectivity, and placing the interest of retirement investors at the forefront of financial planning. From a messaging standpoint, the new Department of Labor fiduciary rule brings consistency and clarity to clients in that we are all fiduciaries.

The new rule sweeps conflicted and self-dealing compensation models into class-wide prohibited transaction exemptions, requiring financial service professionals from all backgrounds — fee-oriented planners (using the level fee exemption), those selling fixed products (using PTE 84/24), and those working with commission products in variable markets (using the best-interest contract exemption or BICE) — to adhere to a uniform fiduciary standard.

(More: Rumors of DOL fiduciary rule's demise greatly exaggerated: panel)

With new compliance requirements under the PTEs and a uniform fiduciary standard for retirement advice, the new DOL rule has already generated hairline cracks in today's status quo, which will quickly spread, evolve and potentially push the profession to buy a few new windshields. So what does the future hold for financial planning?

1. Changes in investment options in 401(k)s and IRAs. There is clear pressure under the DOL rule to manage fees and costs. This could lead to dramatically fewer investment options in qualified plans and IRA accounts. The fiduciary duties of prudence and loyalty create incentives to recommend low-cost investment and retirement plan options. An economy of scale presents an opportunity to lower costs. Government thrift-style retirement plan options may bring less litigation, questions and more easily exhibit prudence.

2. Say goodbye to sales incentives and reward trips. While sales incentives and reward trips were not outright banned, there is pressure to remove them as a form of compensation under the new rules. However, some firms may still reward agents, but must do so in a way that promotes fiduciary conduct rather than the sale of specific products. Look for more required education sessions as part of these conferences and trips.

(More: Why it would be a mistake for advisers to stop implementing the DOL fiduciary rule)

3. Recruiting practices will change. Today, firms recruit and poach successful reps from one another using front-end bonuses, deferred compensation promises, and occasionally a less than opaque wink and nod. These practices fly in the face of incentivizing fiduciary obligations. Moving forward, recruiting will be focused on client value, rather than purse weight. We could also see more salaried employees like other professions (attorneys and CPAs) help encourage millennials and other young individuals to enter the profession.

4. Growth of robo-advice. Merrill Lynch announced it would be curtailing its commission-based IRAs under the new rule and also announced that it would be rolling out a new robo-advice platform to stay competitive moving forward. Robo-advisors are subject to the DOL rule, but there is a clear need for technology offerings moving forward, so expect to see more development and competition in the robo and technology space.

5. Housing wealth as part of financial planning. Another change you should expect to see coming in the future is a more housing-centric view of wealth in financial planning. While not covered until the DOL rule, a consequence of more comprehensive planning will be considerations about home equity as a best interest standard begs for its inclusion. For the average 65-year-old American couple, their home is their largest financial asset. However, most financial advisers do little home equity planning today, especially around reverse mortgages and retirement income. This is going to change. Expect to see more reverse mortgages, more research on home equity and more housing decisions incorporated into comprehensive financial planning moving forward.

(More: Baby boomers' wealth is in their homes)

The DOL fiduciary rule is going to be disruptive. However, there will be a variety of desired and unexpected consequences of the rule. Look for a rapidly evolving profession over the next few years, which will include changes to hiring practices, compensation models, the delivery of advice and even what assets are covered by comprehensive financial planning advice.

Jamie Hopkins is a professor of tax at the American College's Retirement Income Certified -Professional program. Craig Lemoine is an associate professor of financial planning at the American College the director of the Granum Center for Financial Security.

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