I was helping my son with his homework last week, and we were talking about the meaning behind Robert Frost's "The Road Not Taken." It was fascinating and honestly refreshing to hear his interpretation of the poem's meaning — and the logic behind how he arrived there.
His studies aside, I found striking similarities between the choices presented to the reader and the strategies leveraged by asset and wealth managers with respect to implementing the Department of Labor's fiduciary rule.
On one hand, some firms chose to leverage a strict, hard and fast interpretation focused on operationalizing and adapting to the new landscape. And on the other, we saw firms opting to view this through a strategic lens by radically changing their value proposition or altering operating models to gain a competitive advantage.
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From what I've seen from our clients, heard in the marketplace and discussed in our network, I believe those who viewed the rule as a strategic opportunity will emerge as the ultimate winners.
Let me provide some context.
I see the rule as a once-in-a-lifetime event for the industry — with respect to its breadth and scope — as traditional practices are turned upside down, and the player's responses and subsequent choices segments the industry into two camps: the strategists and the disrupted.
Regardless of channel, all firms had to consider a number of factors as the cost of serving clients was increasing while concurrently dealing with a potentially crushing litigation risk. They were also managing these considerations against the backdrop of the industry's push to advisory, goals-based investing, client segmentation and focus on digital channels.
The strategists within the wirehouse and regional brokerage channel choose to use the rule as an impetus to change their business models. The regulations became an accelerant to focus on core strategic themes — allowing these managers to address many of the rule's considerations by embracing a fiduciary posture and aligning service models with client preferences and pushing clients to advisory or developing DOL-friendly digital channels.
Other strategists within the online discount and robo-adviser space saw that clients would be disrupted and used advanced analytics and marketing campaigns to take advantage. By analyzing personas and segments that already played to their strengths, they were able to identify client segments that were losing access to advisers or certain products and subsequently poach them via personalized outreach and special offers. And it's not limited to a client play; a handful of RIAs and RIA custody platforms capitalized on increased break-away adviser activity. Certain strategists were able to empower their own advisers, to increase teaming with advisers who would be challenged moving to an advisory model, to minimize adviser disruption and increase retention and scale amongst their teams. And finally, some strategists used the rule as an inorganic growth strategy by acquiring smaller players that struggled to navigate the post-rule landscape or make the necessary technology investments to comply.
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As a result, strategists that mandated that IRA assets would be managed as advisory relationships, interwove goal-based investing into advice discussions, defined household minimums and service offerings and built, bought or partnered with third parties to introduce digital offerings such as robo-advice, essentially aligned their operating models to these industry trends, driven mainly by a changing client base.
However, most adviser channel firms within the wirehouse, regional brokerage, independent broker-dealer and insurance broker-dealer channels chose a stricter and more narrow interpretation of the rule — and found themselves squarely in the disrupted camp. While they were able to limit their technology investment to compliance, lessen the impact on the existing operating model and avoid altering the unwritten "financial adviser social contract" they lost the opportunity to push for increased fee transparency, strategically segment books of business and drive advisers into more effective service models.
As the other half of the industry chose the more-traveled path, these firms may find themselves facing even greater competition as they focused more on compliance instead of strategy.
While there's still debate about the meaning behind Mr. Frost's words, the rule and the approach asset and wealth managers can adopt is much clearer — defined by a new way forward (perhaps less traveled?).
(More: Winners and losers in the murky DOL fiduciary rule implementation)
Michael Spellacy is the leader of Global Wealth Management at PWC.
