Fi360 president Matt Wolniewicz likes what he sees with product provider prep for the fiduciary rule’s expected implementation.
“I’m most surprised and really happy with the way that institutions have come to the aid of the financial advisors,” Wolniewicz said at the firm’s annual conference in Nashville in May. “In the past, it’s been a ‘bottoms-up’ type of a situation, and now we’ve got providers that have really upped their game and have really offered all kinds of services and solutions to the advisors to help them in these changing times.”
New research from Cerulli Associates backs that claim, and although the future of the Department of Labor Conflict of Interest Rule is uncertain, the majority of managed account sponsors are moving forward with their plans to make changes that conform to the rule, regardless of its outcome.
The Boston-based research and consulting firm finds that more than 20 percent of firms surveyed believe that the rule will ultimately be implemented, and more than 40 percent plan to move forward with the rule’s standards whether it is fully implemented or not.
“Several leaders of managed account firms are taking the long view when examining the DOL Rule, noting that the trend toward fiduciary has taken a secular hold on the industry and will continue to grow with or without the rule,” Tom O’Shea, associate director at Cerulli, said in a statement. “The rule is also affecting the way sponsors think about discretion, and it shines a light on the risk associated with poor investment outcomes.”
Many firms are pushing advisors to use home-office portfolios, he added, because they believe a significant proportion of the advisors at their firm manage client accounts that underperform similar home-office-constructed portfolios.
“The majority of advisors, including small practices in particular, don’t always have the time or skills to perform the due diligence required to construct the best portfolios possible for clients,” O’Shea continued. “Under the rule, it is risky for firms to knowingly allow subpar advisors to manage underperforming portfolios for clients when a better-performing portfolio with a similar risk level is available from the home office.”
Most of the executives interviewed by Cerulli believe that home-office discretion will increase as underperforming advisors are identified and gently coaxed into portfolios created by the headquarters consulting group.
The outsourced chief investment officer model that is popular in the institutional space is also gaining steam through firms partnering with third parties to share the fiduciary responsibility of constructing portfolios.
Cerulli research indicates that asset managers believe that third-party discretion will increase over the next three years, while client and advisor discretion will decline. As firms embrace outsourcing, asset managers will need to be prepared to encounter a complicated, multivalent distribution network with numerous points of influence.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
