While the fiduciary debate has become heated in the US in recent years, from the Department of Labor’s fiduciary rule, to the potential that the SEC will take up its own fiduciary rule, and the latest proposed revisions to the CFP Board’s fiduciary Standards of Conduct, the reality is that the recent fiduciary proposals are not an isolated case. In fact, the movement to applying a fiduciary standard to financial advisors is a global phenomenon over the past decade, for which the fiduciary proposals in the US have actually been mild by comparison to many other countries that have outright banned commissions altogether!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the major fiduciary movement that is occurring globally, how fiduciary proposals have rolled out in other countries (including the U.K., Australia, India, and the Netherlands), as well as the industry shifts that commonly happen after a new fiduciary rule is implemented, and the role that technology has played in fueling this global movement.
First and foremost, though, it is important to acknowledge that the movement to apply a fiduciary duty to financial advisors is truly is a global movement. India was one of the first countries to take action, banning upfront commissions on open-ended mutual funds all the way back in 2009. Australia followed with their Future Of Financial Advice (FOFA) reforms in 2012, which ultimately led to a ban on investment commissions as well. Similarly, the United Kingdom in 2013 implemented their Retail Distribution Review (RDR), which similarly led to a ban on investment commissions in the U.K., and the Dutch implemented a commission-ban that year as well. And in most countries, regulators gave the financial services industry only 12-18 months to prepare for the reforms. Which makes the recent DoL fiduciary proposal in the US, and its extended transition period, seem “mild” by comparison!
The fact that fiduciary rules have been implemented in other countries also gives us the opportunity to see the likely fallout that occurs when financial advisor regulation changes. The common trend in most countries has been that, after adopting new fiduciary rules, the headcount of “financial advisors” appears to decline between 10% and 30%. Notably, though, the individuals who leave appear primarily to be not bona fide financial advisors, but simply those who wrote “Financial Advisor” on their business card, but acted solely as a salesperson… and simply decide they don’t want to actually be responsible for giving financial advice, once the investment commissions are no longer available! Which ironically just leaves even more opportunity for the actual financial advisors who remain behind!
With the fiduciary trend occurring on a global basis simultaneously, one might wonder what it is that has led so many countries to implement fiduciary rules in quick succession. The answer, in a world, appears to be: technology. Because around the world, the rise of the internet has made it easier and easier for consumers to access the financial products they want and need directly, without a financial advisor to sell it to them (and earn a commission)… which makes consumers begin to ask “why am I paying a financial advisor for a product I could buy online anyway?” And forcing advisors to actually begin to give bona fide advice, and not just the “advice” necessary to sell a product. In turn, the rise of financial advisors actually focusing on giving advice makes the fiduciary rulemaking a natural outcome. Because when the majority of advisors actually focus on advice, what standard could possibly apply to advice besides one that requires the advice to be in the best interests of the consumer receiving the advice!?
Ultimately, though, the key point is simply to recognize that as technology commoditizes financial products and increasingly forces advisors to focus on truly giving advice, fiduciary rules to hold that advice accountable to an appropriate standard are inevitable… and thus, the fiduciary movement has quickly become a global phenomenon. Which means our battle over the DoL fiduciary rule is not merely some esoteric isolated debate going on here in the U.S… as the fiduciary movement is impacting consumers and advisors worldwide!