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Retirement industry to undergo major changes with or without DOL fiduciary rule

Firms are moving forward with changes because it makes sense for advisers and their clients

Mar 16, 2017 @ 3:55 pm

By Cynthia Dash

+ Zoom

The business of saving for America's retirement is changing. The retirement industry is facing a $7.7 trillion gap, and the Department of Labor's new fiduciary rule, which states that advisers must give clients the best advice at a reasonable price, is at risk.

The rule was originally supposed to take effect on April 10, but President Donald J. Trump in February ordered its review, resulting in the DOL's recent proposal to delay the rule's implementation for 60 days. Regardless of the rule's final outcome, firms are transforming their approach to the retirement side of their businesses to become more transparent on fees and suitability and are moving forward with changes anyway because it makes sense for advisers and their clients.

(More: DOL issues bulletin to ease confusion over near-term fiduciary rule compliance)

In order to comply with the rule, advisers and brokers must be able to show that fees charged to clients are appropriate, and that any compensation the adviser receives from fund providers is not conflicted. One approach, which is gaining momentum with advisers and brokers alike, is a process called level compensation. The reason that so many are looking to adapt such a program is that it ensures that the funds for a plan are selected on merit, based off the plan's investment policy statement and not the commission paid to the adviser or broker. Advisers and brokers can also lower costs by partnering with back-office trading firms that have a truly automated process. Better automation can lower costs that can also be passed back to the plan to help reduce costs even further.

Another popular option to tackle this challenge is not offering products that pay advisers a commission in 401(k) plans. Others are getting even more aggressive by eliminating commissions entirely and shifting to an advisory model where firms only charge their clients a fee for their advice.

(More: The Department of Labor's fiduciary rule: Where are we now?)

Some firms are also retaining a retirement plan adviser as an investment manager to undertake the fiduciary role, described in Section 3(38) of the law, shifting responsibility to that consultant to manage the plan's assets. Some investment managers are taking a hybrid approach, offering more low-cost investments, such as index funds or exchange-traded funds to smaller accounts while also continuing to offer investment options that carry higher fees to more sophisticated clients.

As Wall Street finalizes plans to implement the new DOL rule, three things are crucial:

1. 401(k)-to-IRA rollovers: Rolling over a 401(k) account into an IRA was once easy. Now, advisers must make sure they disclose the different fees that may be involved in a rollover to an IRA. It will be essential to clearly explain those charges to clients.

2. Mutual fund suitability: Advisers need data and tools to compare offerings and provide data to clients to help ensure suitability from both an investment and fee offering. Services that provide this analysis are key for firms to have.

3. Customer communications: Firms have a laundry list of new communications to prepare — a fiduciary acknowledgement letter, a best-interest contract disclosure, and updated intranet and public websites, among other things. Smart firms will take this opportunity to strengthen customer relations.

Firms that provide a broad range of offerings from passive to active investments will thrive, as will those that offer excellent advice and communicate effectively with clients. Complying with the rule is not a set-it-and-forget-it obligation: Wealth managers will need to continuously monitor and mitigate risk.

(More: Keep calm and carry on with both commissions and fees)

For those who get it right, the effort will be worth it. A recent survey of investment professionals from Roubini ThoughtLab predicts that household assets will rise $89 trillion in the top 25 markets globally within five years. Firms that effectively adapt to changing models of client engagement and move with the trend of leveling fees and focusing on advice will grow assets under management.

Cynthia Dash is general manager for Matrix Financial Solutions, a Broadridge company.

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