As firms and advisors begin to define their business models in a post-DOL world, many are making headlines. Merrill dropped commissions altogether in retirement accounts and will not use a BICE. Others, like Ameriprise and Raymond James, have announced they will use a BICE and, in some cases, continue to allow commissions in IRAs, but smaller accounts are going to be transferred to service centers or put into various robo offerings. With all of these moves, and the many more to come leading up to the April 10, 2017, deadline for initial compliance with the DOL’s Fiduciary Rule, there is one common theme to the decisions - risk management. Every firm is assessing the risk exposures they face under the new rule and, in particular, the risks associated with class action lawsuits.  As many fundamentally understand, while the general rule of U.S. law for defendants is that you are innocent until proven guilty, that applies only in criminal proceedings. In a civil class action proceeding, firms will be forced to defend their business practices, product lineups, compensation strategies, advisor knowledge, and many other elements of their business model in courts where there won’t necessarily be a judge or jury with a pre-disposition to believe in the innocence of “Wall Street” versus the client.

First in a series of articles, we are exploring some of the key issues that we believe firms need to address with their business models and their advisor capabilities in preparation for that dreaded moment when they are called to the stand and are being sworn in for testimony - hearing the words “Raise your right hand and repeat after me."

Reasonableness of Fees

Anyone remember the days in the early stages of “Managed Money” when so-called Wrap Accounts had fee structures that, in some instances, charged clients 250-300bp (not to mention the underlying fund charges)? Today, these arrangements have seen fees drop to an average of about 100-150bp. And what do clients get for that? Certainly they get the asset allocation, fund screening, due diligence, investment selection, portfolio monitoring and re-balancing. In some cases, firms also throw in additional services of value such as financial planning, trust services, and other such “advice-centric” guidance from their advisors. Given that the DOL Rule expressly establishes the requirement for firms to charge reasonable fees for their services, firms must begin to assess their fee structures and determine “reasonableness.”

The Robo-Benchmark

While it can be argued ad nauseum whether a robo offering is effective or not, the reality is that they are a significant competitive threat, with a strong business offering. These robo platforms offer a 24/7 portfolio management protocol, consistently implemented in a highly disciplined model that provides guidance and trading for clients around asset allocation, sub-asset class diversification, investment selection, re-balancing, fee oversight and even tax-focused trading. In essence, a lot of the same things that a portfolio manager or wealth advisor has, and will continue to do. The major difference - the robos do all of this for 20-40bp. This might become a de facto benchmark for core investment management in the future. For firms to charge more, they will likely want to consider how they will address this question when they raise their right hand and respond to the question: “What specifically do you deliver to your clients that justifies the incremental fees you charge versus a robo?” Undoubtedly, these questions will be followed by questions pertaining to how you have equipped your advisors to ensure they can deliver that “elevated” or “enhanced” type of advice/planning/guidance.

Check back for our next article in this series where we explore “Explicit Pricing of Advisor Services” in a continuum ranging from core investment oversight to comprehensive planning - and the strategies firms can use to not only clarify their value added, but also ensure their advisors are equipped to deliver those services. In addition, we will identify ways to certify and document knowledge and competencies of each advisor that will provide incremental protections when anyone in the industry is forced to “RAISE THEIR RIGHT HAND.”