In an uncertain DOL environment, a potential implementation path for advisors

DOL preparedness, now or later The major regulatory (DOL), demographic and technology changes confronting financial services won’t spare a single part of the industry’s supply chain. The question is, how should advisors best respond in order to survive in the short term and thrive in the long term? Since December 2015, we have touted the Four Pillars of a Sustainable Enterprise in response to these currents of change.

Pillar #1: Manageable number of client households

Pillar #2: Product inventory control

Pillar #3: Documentation of key processes

Pillar #4: Optimized client experience

In recent months, as key industry stakeholders have begun retooling their strategic vision and the day-to-day functions of their businesses, we anticipate three trends emerging that will have direct implications for financial advisors:
  • Increased liability. The proposed DOL rule represents an immediate increase in the liability associated with being a financial advisor. Depending on the situation, the liability may come in the form of fines, litigation and even enterprise closure.
  • Accelerating margin compression. In the medium term, the DOL and technology competition (e.g., robo-advice) are putting pressure on fees. At the same time, costs are increasing, so many advisory firms’ margins are being squeezed, which jeopardizes the long-term viability of an advisory firm.
  • Increasing need for competitive differentiation. Technology and public perception are putting pressure on financial advisors to differentiate themselves. As consumers become accustomed to the unique and customized experiences routinely delivered outside of the financial services realm, they will come to expect a similarly personalized level of service and experience from their advisor, too.
The key to long-term success for advisors will be to address these trends in such a way that prioritizes advisor survival in the near-term and strategic differentiation in the longer term. The Four Pillars can help in that regard, because they each align with the trends: The 4 Pillars Developing a sequenced response to the changing advisory landscape In terms of which trend advisors should consider addressing first, we believe that the increased liability is the most near-term threat – both from a timing and a scale of enterprise risk perspective. So advisors should consider addressing that challenge first – via Pillar #3 – before tackling the implications of margin compression (via pillars #1 and #2), and finally competitive differentiation (via Pillar #4). The following is a sequenced implementation for consideration:

First, tackle Pillar #3 – Documentation of key processes

Having comprehensive and tangible operations manual that documents the key processes that an advisory firm executes in order to act in the client’s best interests can help advisors address the increased risk of liability under the DOL rule. However, even without the DOL rule, this sort of documentation is beneficial as it can help reduce the number of errors, provide personnel with valuable role clarity and potentially enhance the valuation of the advisory firm.

Second, undertake Pillar #1 – Manageable number of client households – and Pillar #2 – Product inventory control

By consciously managing the number of client households they work with and being selective about the number of products used in their business, advisors have the ability to address margin compression through the key variables that drive profitability and are within the advisor's control.

Third, address Pillar #4 – Optimized client experience

Focusing resources on developing deeper client relationships and delivering corresponding value can allow for true competitive differentiation.

Get started: Assess your level of preparedness for Pillar #3 – Documentation of key processes To help you gauge where you currently stand in terms of implementing Pillar #3, consider the following questions:
  • Do you have a written plan that takes into account each client’s goals, circumstances and preferences?
  • Do you document how your investment selections align with every client’s plan?
  • Have you documented the workflows that lead to strong client relationships?
  • Do you have written documentation of key processes that align with your home office policy and support your client service model?
  • Is there role clarity among all members of your team?
If you find yourself answering “no” to any of these questions, then you likely have some work to do. We’re here to help.
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