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There are three types of people in this world – those who make things happen, those who watch things happen and those who wonder what the heck just happened. You don’t want to be in the latter category. Unfortunately, many financial professionals will find themselves firmly rooted in that category as they take a “wait and see” approach to the Department of Labor’s (DOL) fiduciary rule.
As the industry collectively holds its breath on whether court challenges or the Trump administration can alter or repeal the rule, the well-prepared advisors are already bracing for the changes that will need to take place within their practices.
The smart play is to operate under the assumption that the ruling will hold its course and take effect as planned. As part of that preparation, many advisory firms need to re-evaluate how they do business.
While it’s well-known that the DOL’s fiduciary ruling requires all financial advisors to put their clients’ interests first, financial services professionals are still unable to know how broad of an impact the ruling will have on other aspects of their practice, including marketing. The rule itself doesn’t specifically change the regulation surrounding marketing activities, but as much is implied.
What changes in a post-DOL world?
From a marketing perspective, we will see four changes take place in a post-DOL world. As a result, financial advisors will need to revamp their marketing approaches to survive and capitalize on the opportunity.
Change #1: A shift away from product-focused marketing
A simple example is advertisements that are specific to a particular product or product category, like mutual funds, separately managed accounts or annuities. While this isn’t necessarily a requirement of the rule, advisors would be well-served to avoid marketing the product of the day. A better alternative is for advertisements to be focused on a planning strategy, rather than a specific one-size-fits-all solution.
Change #2: Misleading advertising will gain heightened scrutiny
This will happen for two reasons – the newly formed “financial institution” and the newly formed opportunity for plaintiffs’ attorneys. If you are a FINRA-registered representative, you’re likely familiar with advertising review. Financial professionals who operate solely on the insurance side or investment-advisory side of the equation will likely see a new trend develop: Advertising review requirements from their financial institution, as newly defined by the DOL.
The other reason we will see misleading advertising gain more attention is a little more contentious. Just as you’ve seen plaintiffs’ attorneys posting billboards and running TV ads looking for people on whose behalf they might be able to win a lawsuit, this rule could open the door for that to take place in the financial industry. The easiest pickings for these attorneys will be egregious and misleading advertising.
Change #3: Definitive statements about 401(k) rollovers will need to be curtailed
I’ve heard and seen countless pieces of marketing give the direct advice that somebody should roll over their 401(k). According to the rule, such a definitive statement could fall outside the scope of “best interests.” It may or may not be in somebody’s best interests to transfer their 401(k) to an IRA, but an advisor’s marketing will need to be careful, so as to avoid being so declarative in nature.
Change #4: There will be less marketing taking place
This will happen for a few reasons. For starters, the three items referenced above will slow some of it down. However, the biggest reason for the slowdown will be the conflict of interest that it represents. A large percentage of the marketing and advertising that is done in the financial services industry is actually paid by somebody other than the advisor or firm that is being promoted. The financial industry is littered with tit-for-tat incentives, and they all follow a similar narrative: If you place a certain dollar amount with a particular company or investment, that company (or its wholesalers) will compensate you accordingly. Some of these agreements are more blatant than others, but there is no arguing that these arrangements exist and are, in fact, quite prevalent. To be frank, this is a large part of what the rule is trying to eliminate.
While some companies, vendors and wholesalers may get creative as they try to disguise these arrangements, the penalties for violation are much stricter as a result of the DOL rule. The transaction(s) could be deemed prohibited and trigger an excise tax, and/or the financial institution could lose its ability to enter into a best interest contract exemption (BICE) agreement, if it is found to be in violation. Those are not just minor infractions. They represent significant financial and reputational penalties to the advisor and their financial institution. Trust is paramount for fiduciaries – the DOL rule arose out of concerns about advisors failing to take clients’ interests into account when making recommendations. Smart advisors aren’t looking for a way to continue along with their old habits.
How can advisors prepare?
Advisors need to make sure that the financial institutions they choose to partner with in the future understand the ruling. Both the advisor and institution need to comprehend the extent of the changes under the rule, ensure they’re not violating it and proceed cautiously in navigating it. Most importantly, though, an advisor needs to partner with an institution that is willing to embrace marketing in a post-DOL environment. For those who are willing to play the right way and align themselves with forward-thinking firms, there is plenty of opportunity to be had as a result of the rule.
The critical differentiators among advisory firms will be service and trust, far more than products. Mark Mersman is the chief marketing officer at USA Financial, as well as one of the co-hosts of the nationally syndicated USA Financial Radio Show. USA Financial is a comprehensive financial services institution, focused on providing advisors with the tools required to make solid recommendations and to empower clients to make educated and informed financial decisions. For more information, go to www.usafinancial.com/pro.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.