ACTIONABLE ADVICE FOR FINANCIAL ADVISORS: Newsletters and Commentaries Focused on Investment Strategy

Five Steps to Demonstrate Your Value Today

March 19th, 2013

by Dan Richards

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Dan Richards

Of the broad trends facing the financial service industry, the most powerful will be greater transparency. It will force everyone – and advisors in particular – to clearly demonstrate the value they provide. How advisors respond to this shift to a value-driven world will determine whether they succeed or fail.

Around the globe, many advisors have become concerned about some of the regulatory proposals around mutual fund fees and compensation for advisory services. Among the options that regulators have identified are:

  • Requiring mutual fund companies to have low-cost execution only series (such as the no-load and low/no-12(b)1 share class) available for purchase directly from a fund manager or on a discount broker platform;
  • Mandating the unbundling of trailers from fund management fees with fee-for-advice billed directly to each clients as a separate charge;
  • Requiring that advisors operate as fiduciaries putting client interests first in all cases;
  • Either capping point-of-sales commissions or banning commissions all together on mutual funds. On banning commissions, one regulator’s proposal described this as,” the most straightforward way to align the interests of mutual fund companies and advisors with investors.”

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Avi Nachmany is executive vice president of consulting firm Strategic Insights and one of the investment industry’s most respected observers. He points to concerns among regulators that the advisor-client relationship is fundamentally based on trust and as a result advisors’ pricing power is significantly asymmetric, even with greater knowledge on the part of clients. That’s because the trusted advisor drives both investment choices and the fee-for-advice price equilibrium. As a result, regulators around the world are looking at mandating practices that they view as being in investors’ best interest.

I’ve recently received several emails asking about the impact of some of these scenarios. As one recent email put it: “ If you believe there is opportunity in chaos, how do you effectively prepare for the new dawn?

Regardless of how the current regulatory proposals net out, given trends in Great Britain, Canada and Australia, it’s hard to imagine that we won’t see greater transparency and disclosure on compensation – and not just on mutual funds but for all product solutions. As you think about this trend, here are some thoughts you might want to consider and some lessons from another industry that went through the same fundamental changing-of-the-rules that the investment industry may be facing.

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