Much has been written about the Department of Labor's fiduciary rule, and the issues it does and doesn't address. Opinions within the wealth management industry remain divided, but at the end of the day, change is coming whether we like it or not.
Like any far-reaching government statute, the fiduciary rule has its deficiencies — but as long as advisers and investors keep in mind where the fiduciary rule falls short, they can use that information to their advantage when navigating the changing landscape.
In today's new reality, advisers and investors should remember:
1. Education is more powerful than regulation
The biggest issue facing all investors is a lack of education. If investors were better educated about different types of retirement-saving strategies and investment products, there would be fewer issues with suitability to begin with.
To its credit, the DOL's fiduciary rule fact sheet notes that one of the mandate's goals is to “preserve access to retirement education.” This is promising because, as long as advisors avoid mentioning specific stocks or investment products, they would be able to educate investors about “general” retirement saving options without violating their fiduciary responsibility.
2. Money is emotional
Even if you throw out all of the commissions, fees and conflicts, people can still make bad financial decisions if they let emotions override objective analysis. It is impossible to look at retirement savings vehicles in a silo and point the finger at advisers as the primary source of what is holding back so many people in our country from achieving their financial goals.
Money is understandably an emotional topic for people, but investors need to take personal responsibility for financial mistakes they make when they let emotion cloud their judgment. Even though some investment solutions may seem less suitable than others on paper after doing the simple math, investors may nevertheless choose less suitable options because they “feel” right. This is why creating a marketplace with fewer choices will not necessarily provide investors with more protection.
Advisers need to help investors keep their emotions in check when making any decision, no matter how big or small, related to their portfolios.
3. Advisers add alpha
Littered throughout the DOL's rule is the insinuation that conflicts of interest in the financial services industry have caused investors to lose around 1% of their savings. Anyone reading this article can do the math and come to a similar conclusion.
However, let's try a different type of calculation — the alpha advisers can add to investors' net worth. A widely reported Vanguard study from 2014 demonstrated that working with an adviser can add up to 3% to an investor's net worth due to behavioral coaching,
financial planning and rebalancing that only advisers can provide.
The fiduciary rule has generated public interest in what it means to act in the best interest of investors — and this presents an opportunity for advisers to demonstrate to investors the unique value they offer.
The fiduciary rule will not prevent advisers and investors from forging ahead and continuing to strive for success. If advisers keep the fiduciary rule's shortcomings in mind going forward, they can adapt to the new landscape and potentially achieve better investment results in the process.
David Lyon is CEO and co-founder of Oranj, which provides traditional wealth managers with digital advice tools.
