On October 25, 2011, the Department of Labor (DOL) released its final rules related to the provision of Investment Advice under the Pension Protection Act (PPA) of …wait, here it comes… 2006, that pre-financial-crisis, almost-forgotten law. So, why should financial advisors care about a DOL ruling when the DOL regulates advice in retirement plans that fall under the Employee Retirement Income Security Act (ERISA)? Well, the reason is because the DOL also happens to regulate “prohibited transactions” on Individual Retirement Accounts (IRAs).
This is where some of the confusion begins. Based on some comments I have read in the industry press, it seems many people in the advisory business believe that the DOL is muscling in on IRAs for the first time. However, that is not the case. If you go back and read any of the DOL’s past rulings on investment advice, such as the SunAmerica Advisory Opinion, they almost always mention that these rulings apply to IRAs, as well as ERISA accounts, when the advice is provided by a fiduciary.
Some of the confusion stems from the fact that the regulations can be challenging to read and decipher. For example: “The Department did not receive any substantive comments with respect to paragraphs (b)(4)(i)(D), (b)(4)(i)(E)(1)and (2) and therefore is adopting these provisions as proposed, now at paragraphs (b)(4)(i)(E),(b)(4)(i)(F)(1) and (2) of the final rule.“ I have spent a fair bit of time combing through industry regulations, and these are as perplexing as they get.
Confusing or not, the regulations are important, and advisors should carefully review them with their compliance teams. The regulations are targeted at providing two additional means to avoid prohibited transactions on retirement accounts: a computer model method and fee leveling method.
These regulations are additive to current prohibited transaction relief. In other words, if advisors are using prior relief, such the SunAmerica Opinion, to avoid prohibited transactions in their IRA accounts, then they may continue using that approach. However, this is a good opportunity for financial advisors to review their current advisory programs that include IRAs to ensure that they are in compliance with the DOL standards around prohibited transactions. In addition, financial advisors should pay special attention to forthcoming DOL regulations that may expand the definition of fiduciary for purposes of these rules.
The success of any firm’s wealth management business depends in large part on the capabilities of the technology that is employed.
When evaluating your wealth management technology or evaluating a vendor offering, consider these critical needs:
- Is the platform client driven? To remain competitive, consolidating accounts and relationships is imperative to managing and retaining clients.
- Does the platform have a solid financial planning component? To compete in the wealth management business, firms must understand the entire client picture – their needs, goals and retirement plans. Without a sound financial planning tool, it is difficult to keep the pace.
- How solid is the platform’s customer relationship management? While CRM can mean different things to different applications, having the tools to properly manage and stay connected with clients is crucial.
- How flexible is the platform’s integration? Does your firm’s investment advisor framework provide a simple experience, and is it open enough to integrate additional products into a single interface? Is it web-based, or are there portions that must reside on the advisor desktop?
- Do you have a reliable on-boarding tool for new clients? How easy is it to maintain your client and account data?
- How robust is the trade interface, and how expansive is the range of asset classes you are able to offer your clients?
- Does the platform have the ability to reevaluate and rebalance portfolios based on the client’s changing financial needs?
- Is the platform ready for the new regulations around cost basis processing?
- How integrated is its data management capabilities? Can it bring together all of your wealth management information, and provide informative dashboard reporting to your financial advisors and wealth management executives?
These nine wealth management technology requirements are critical to wealth managers’ ability to attract and retain clients and grow their businesses. The right platform can help them increase their efficiency, productivity and value to clients as a trusted advisor.
How well is your technology platform addressing your wealth management needs?
An advisor was recently asked what the difference is between an online trading brokerage account and a self-directed account. Is there a difference between the two, or is the term “self-directed” just a new name for the same old, online trading account?
Online trading accounts rose to popularity in the mid- to late-1990s, when it was the wave of the future and certainly had its benefits. Online trading accounts increased the number of individuals owning securities at a faster rate than any other time since the stock market crash of 1929. That party lasted until 2000, when the technology industry’s bubble burst.
The amount of trades entered online plummeted then, and online trading did not recover until the mid-2000s. Around that time, particularly in retirement and 401k accounts, investors were allowed to pick the securities in which they wanted to invest. Most of the time, their investment selections were limited to the options an employer chose for them, but more and more qualified plans started to offer investors the ability to choose to invest in securities not offered by their companies.
With the great recession, investors welcomed the ability to choose their own investments for a variety of reasons, including:
- They thought they could do better than their advisor
- They were from generation Y, and had an increased familiarity with the Internet
- They simply liked having control over their own destinies
Does being self-directed take online trading one step further by providing the user with new tools to do their own research before investing? Major online brokerages have been offering online tools for financial planning, and some have been providing access to a live broker for over 10 years now. In other words, online tools being available in self-directed accounts really are nothing new. Full service and wealth management firms now are offering online trading, and are looking to distinguish themselves may be where “self-directed” was born. Or perhaps the terminology was adopted from the 401k and IRA community because it describes essentially what an investor is doing anyway.
To answer the original question of whether there is a difference between an online trading account and a self-directed account — perhaps it merely is a new catch phrase used to set one type of firm apart from another. What’s your opinion?
Historically, the financial planning and advice industry focuses on advisor-centric offerings targeted at higher net-worth clients. The delivery has varied across many types of firms, but the essential program has remained the same — a very skilled (and highly compensated) advisor, serving a small number of relatively wealthy clients. The most prevalent model consists of the advisor having a series of face-to-face meetings with the client to gather information about goals and objectives, assets and liabilities. The advisor then formulates a financial and/or investment plan and again meets face-to-face with the client to deliver the plan.
This model has worked relatively well, particularly with clients who have more than $1 million in investable assets. This market, the affluent, could generate enough revenue to make the time and the effort of advisors worthwhile. However, the model has never translated very well to the mass affluent market, broadly defined as clients with between $250,000 and $1 million in investable assets. These clients simply cannot generate the revenue to compensate for the amount of time and effort an advisor spends on his/her account.
However, the mass affluent segment still wants and needs advice — now more than ever before due to the erosion of wealth and, more importantly, confidence in the future.
So, how can financial institutions provide an advisory offering to serve the mass affluent market? The technology components exist today to provide a comprehensive, scalable and efficient advisory offering to the mass affluent space. The challenge is weaving the components together to conceive such a platform.
Core components of such a platform include:
- A streamlined workflow application to automate functions such as account opening
- Flexible and configurable advisory tools to gather and store client data, build investment proposals, and set asset allocations
- Robust rebalancing and overlay management functionality to streamline and scale the investment management process
- Comprehensive performance reporting and fee billing capabilities
- Interactive client portals for the storage and delivery of documents and other information
- Robust compliance tracking and auditing functionality
- Widespread mobile and telepresence communications capability
Essentially, it should be every firm’s goal to use technology to streamline as many mundane and manual tasks as possible, and make the process more efficient. All of the technology mentioned above exists today. However, it is uncertain whether there are any institutions with the full capabilities tied together in a comprehensive platform. Deploying that type of comprehensive platform would be a major challenge that requires the examination of nearly every existing procedure and workflow, but it could reap enormous benefits. It is estimated that the mass affluent make up nearly 22 million U.S. households, making it an attractive market to pursue.
What is your firm doing to attract the mass-affluent?
Last week, I had the opportunity to attend and present at the Financial Planning Association’s (FPA) Major Firms Symposium in San Diego, CA. So much has changed in the financial planning space since last year’s symposium that I thought I would share a few key observations and conference highlights that stood out to me.
First and foremost, the technology landscape has changed and is moving faster by the day. The evolution of the iPad has taken us all by storm. I have to remind myself regularly that the iPad was launched just in April 2010. It would be a dream-come-true if we could capture a percentage of that adoption for other advisor tools that are currently on the market. But nonetheless, it is fair to say not only that did the symposium’s presentations evangelize the power of the iPad, but also that it was obvious how tablets are changing the way advisors adopt technology. Advisors are now, more than ever, pushing technology providers, SunGard included, down the innovation path and at a quicker pace than ever anticipated.
Second, the method in which advisors perform financial planning is should evolve to be a “higher touch” experience. During George Kinder’s presentation titled, “Financial Planning as the Value Proposition” he spoke about how important it is to have deep emotional relationships with clients. This involves a great deal of listening and asking the non-financial questions to truly obtain the ultimate “goals” or “dreams” a client has. He quoted a statistic that 75% of clients would not refer their advisor to others. That is astonishing. In times when advisors have to work harder than ever to earn their clients trust, it seemed apparent that advisors could help re-establish trust through “life planning.” Based on this information, I am very interested to explore how technology can help advisors make the shift to this type of planning approach.
Lastly, I found the presentation by Cambridge Investment Research discussing their approach to social media very enlightening. Instead of fighting (or denying) the power of social media, they chose to embrace it for their advisors. They established a dedicated support team internally and then implemented social media monitoring software that allows their advisors to use LinkedIn, Twitter, and Facebook. Content has to be pre-approved and then software is used ongoing to monitor. They do not yet track revenue and referrals by virtue of social media, but they do have specific advisor testimonials that document how they have won new clients and revenue as a result of their efforts. In less than one year, they achieved over 15% adoption from their advisors.
There were several other quality presentations I did not get to touch on, but I am sure you can see from the little bit I have shared that technology and advisor interactions can have a strong positive impact on a client’s planning experience. Considering how much has changed, I greatly look forward to seeing what the symposium agenda will bring next year.