Fiduciary Key

By Jenny Kvaskova and Ben McNeil in London, and David Lo in New York


The Hippocratic Oath – ‘do no harm’– is a rite of passage for many medical graduates around the world. Seems a no brainer, right? But why then, does the same principle – to work in your client’s best interests – become a contentious issue when it comes to providing financial advice?  


This dilemma is unfolding in the US, where the Department of Labor (DoL) has, once again, requested a delay to the final sections of the fiduciary rule by at least another 18 months – meaning it would not be in full force until July 2019 at the earliest (rather than the original April 2017). And while many parts of the rule have already been introduced – the key remaining issue at the heart of this proposed legislation lies with the term ‘suitability’.


Disclosing conflicts of interest

Perhaps unsurprisingly, some industry experts believe the term ‘suitable’ to be a low bar to aspire to, and because it does not mean ‘best’ – it may come with high associated fees for the client and therefore not in their best interests. This is a thorny issue because even though the majority of advisors do exercise fiduciary prudence in their recommendations, some financial brokers have been known to be less forthright about disclosing their varying fees and commission structures, among other conflicts of interests.


To address this and shed greater transparency on the issue, the regulator is proposing advisors sign a disclosure agreement with their clients to explain when conflicts of interest, such as receiving higher commissions for selling certain financial products, arise. 


The costs are high

Wealth management firms however are resisting for myriad of reasons – with time and money being most often voiced. According to Securities Industry and Financial Markets Association (SIFMA), getting to full compliance with the fiduciary rule will cost firms upwards of USD4.7 billion, exceeding DoL’s original estimates of USD2-3 billion. The fear is that these costs will be passed on to the client, making comprehensive investment advice and planning out of reach for the mainstream investor. Moreover, delays in rule implementation are creating some confusion. Timelines have been pushed back several times and with the Republican administration in power – the rule may be scrapped altogether.


This leads to some obvious questions and possible crossroads as wealth managers grapple with what to do next. Many are well on their way to implementing required infrastructure and compliance changes so does the absence of a deadline actually matter if the objective is to serve the client’s best interests?


Lessons from the other side

The UK introduced a similar fiduciary rule in the form of the Retail Distribution Review (RDR) in 2013 – addressing manager fees and banning commissions. Similar to the predicted outcome in the US, advisors in the UK responded by raising the minimum level of investable assets necessary to receive advice, leaving mass affluent customers out in the cold. And while the DoL does not completely ban commissions – the rule is likely to shift how clients pay for financial advice.


Setting aside the large costs associated with compliance in the implementation, there appears to be ample evidence that satisfaction with a fee based relationship is higher compared with clients in a commission based relationship. Scorpio Partnership’s HNW research in this space shows that US client experience is higher in fee based relationships than in commission only models (see Figure 1). Indeed, both the Net Promoter (NPS) and the overall satisfaction (OSAT) scores are higher. Proponents of the fiduciary standard would point out that in fee based models, the goals of the wealth manager and the client are more likely to be aligned than if the relationship is purely commission based.


Figure 1: Client experience

Q. What is the payment model for the services which your wealth manager provides you?


Source: Scorpio Partnership

The opportunity

Needless to say, the advice gap that emerged post-RDR was unintentional. On the positive side however, it is creating numerous opportunities for firms to develop new products and update their propositions. Automated offerings and robo-banks, for example, present innovative ways with which to service new and existing client segments. Moreover, in the UK, the Financial Conduct Authority (FCA) is creating regulatory sandboxes and encouraging direct-to-consumer (D2C) incubators to provide guidance to those not eligible for traditional advice.

So while it may be prudent to evaluate the full impact of the fiduciary rule prior to its implementation, it is perhaps even more prudent to ensure that client wellbeing is at the heart of everything wealth managers do. Our client experience data suggests that moving to the fiduciary standard is the right thing to do for the client. The path to growth is ultimately through exceptional client experience – driving satisfaction, referrals and better bottom lines for firms. As such, our insights also suggest discounting the cost implications of implementation – because the real opportunity for forward thinking firms lie with identifying technology related solutions with which to solve the evolving advice gaps.  


News from the world of wealth:

FCA highlights misleading claims by asset managers – Reuters

Vanguard shifts indexes on 3 ETFs ahead of sector changes – Benzinga

Due diligence on cybersecurity becomes bigger factor in M&A – Wall Street Journal

WEF leads creation of FinTech cyber security consortium – Reuters

Shadow banking grows to more than $45tn assets globally – Financial Times


Thought of the week: “The best preparation for tomorrow is doing your best today.” – H. Jackson Brown Jr


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