The looming implementation of the Department of Labor's fiduciary rule has raised many questions about whether products like non-traded REITs, variable and indexed annuities, and actively managed mutual funds will still be able to survive and thrive when commissions are at least curtailed. And the shift raises significant challenges for the broker-dealer platforms that distribute those products. But as it turns out, broker-dealers aren't the only ones facing significant collateral damage from the coming product fallout.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how the contraction of commission-based products may also lead to a significant contract in financial services product advertising, which could have significant spillover effects into the industry trade publications and membership associations that are highly reliant on those advertising dollars to buy ad inventory and booth sponsorships.
Ironically, though, a contraction in financial services product advertising could actually be a boon for financial advisors, as a reduction in the advertising from financial services product manufacturers after our clients' money could leave more room for advertising from companies that actually create solutions for advisors themselves. There's more room for advisor FinTech firms and industry consultants to compete for advisors' attention when they're not being crowded out by large financial services product manufacturers.
But given that solution-providers for advisors tend to be much smaller companies, with less revenue and less advertising buying power, a contraction is still coming in industry advertising, which could have harsh consequences given the over-abundance of industry trade publications and conferences, all vying for advisors' limited attention.
In the long run, though, the reality is that financial services industry advertising may end out being larger than ever. After all, if financial services product manufacturers cannot compete by paying the best commissions, and have to compete by designing and offering the best product, there's even more pressure to market that product effectively. Which means more advertising, and more spending at conferences. But given the timeline for DoL fiduciary implementation, those dollars may not show up until 2018 and beyond. In the meantime, trade publications and membership associations may be facing a very tough 2017.
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Welcome everyone! Welcome to Office Hours with Michael Kitces!
I want to talk today about DoL fiduciary, and some unintended consequences that I think are going to come from the new rule.
Or frankly, a better label for this is probably not unintended consequences, but maybe secondary effects.
Unintended Consequences And Secondary Effects From DoL Fiduciary - [Time - 0:34]
For those of you who aren't familiar with the context... when there's an earthquake, direct damage from an earthquake is characterized as a primary effect, such as when there's an earthquake and a building falls down.
But then there is the collateral damage, or what's called the secondary effects. For example, a secondary effect of an earthquake might be that the earthquake also knocked some power cables loose, which fell down and caused a fire. And then the fire turned out to be way worse than anyone expected because they can't put the fire out because the water mains also broke in the earthquake.
So all the damage caused by the fire is not direct damage from the earthquake, it's the secondary knock-on effect that happened as the original damage rippled outwards.
And I think we're going to start seeing soon some of the secondary effects that crop up from the DoL fiduciary rule.
We've already started talking on this blog about the primary effects. There will clearly be more pressure on commission-based products. The DoL fiduciary rule doesn't necessarily bar commissions, but certainly DoL has put a whole lot of additional scrutiny for companies to justify commissions. There's a lot of pressure to go with levelized compensation. This shift in compensation especially impacts a subset of products - those that historically have had larger upfront commissions. This includes non-traded REITs, variable annuities, indexed annuities, and a number of actively-managed mutual funds which now increasingly are going to get pushed towards institutional class shares that get held in a wrap account or with an RIA.
In addition, DoL fiduciary puts all sorts of new pressures on broker-dealers themselves, which historically operated as distributors or intermediaries for financial services products. And so as we go from a less product-centric world to a more advice-centric world, where you don't necessarily have the same scope of products and the associated commissions, it's not entirely clear what the purpose is to have a broker-dealer anymore. So I think the broker-dealers have to go through a bit of a reinvention themselves.
But what I want to talk about today are not the impacts of these primary effects, such as what happens to annuity products after DoL fiduciary, or active funds or other commission-based products. I want to talk about secondary effects.
And to me, one of the most interesting secondary effects that we're going to start seeing from DoL fiduciary is how it's not only these types of products that start getting pulled back... it's also the advertising their parent companies do to market those higher-commission products.
How DoL Fiduciary Will Change Financial Services Industry Advertising - [Time - 2:54]
Think about it for a moment, as a financial advisor...
[Periscope comment]: "So product providers stop sponsoring professional organizations??"
Yes, exactly. When you are an advisor and you're at a conference, think about who you see in the booths in the exhibit hall. Or when you're on the website of one of our industry trade publications, or when you get their emails... what do you see? What are the ads? Who are the advertisers?
If you think about it, a lot of those ads are for non-traded REITs, variable annuities, indexed annuities, active funds, and recruiting for broker-dealers. It's the exact same companies that we just put on the list of those threatened by DoL fiduciary.
Now, I don't necessarily think that all those products are going to vanish completely. But if the financial strength of membership associations and trade publications are built primarily on the backs of advertising revenues, and they rely on the advertising and conference sponsorship spending from a whole bunch of product providers that are in the cross-hairs of DoL fiduciary... what happens to everyone's financials when the advertising spends start getting reigned back a little?
How DoL Fiduciary Impacts Trade Publications and Membership Associations - [Time - 4:08]
Now, I actually warned about this last year, when I wrote about some of the dynamics going on between the CFP Board and the Financial Planning Association. I'd warned that the FPA may have set itself up for a massive business challenge going forward, because the organization - as many membership organizations - is very reliant on advertising and sponsorship revenue from its conferences. And now conferences may see a significant pullback in advertising dollars, which will make membership associations suffer.
And I think trade publications will go through the same thing. The ones we all regularly read, like Financial Planning, Financial Advisor, ThinkAdvisor, InvestmentNews. All those leading trade publications.
Because, again, think about when you go to their websites or when you get the emails with their latest content... what do you see? Lots of ads for active funds, ads for broker-dealers, ads for annuity products and non-traded REITs. Ads from all the companies that are most likely to be at least short-term disrupted by DoL fiduciary.
And I'm actually starting to hear some rumors that this is beginning already. That of these groups and companies are looking at advertising activity and conference sponsorship activity in the second quarter and now coming into the third quarter, and they're already seeing a little bit of the pullback begin. And frankly I think it's going to get much, much worse through the end of the year, before it gets any better.
Because there are still a lot of companies that are already committed to advertising spends. They're already committed to certain conferences. When they start making new decisions from here, and they look at where they want to spend dollars going forward, there will be a pause in financial commitments. After all, if you're not sure if your product is going to exist in nine months, you don't do a big advertising spend this fall! You dial all your marketing dollars back. You go back to your product design people, and figure out how you're going to redesign the product to see if it can even survive in a DoL fiduciary future. Only then does the product manufacturer start thinking again about advertising.
[Periscope comment]: "No more golf balls?"
Indeed, you might not see so many golf balls and swag at conferences coming up in the next couple of months here!
New Advertisers Focused On Solutions For Advisors, Not Their Clients' Money? - [Time - 6:14]
Now, there are actually some interesting silver linings to this coming shift in advertising. One of the most positive effects that I think will come out of this in the short term - I hope it sticks for the long-term - is that it opens the door for a new range of companies to advertise.
As many of you know, one of my longstanding gripes, is that when I go to a conference and I look around at who's in that exhibit hall, what I see is almost no one that's there to actually give me solutions as an advisor, and almost everybody is there because they want my clients' money.
Think about that for a moment. Who do you see at a conference? How much advertising is chasing the money we oversee and are responsible for on behalf of our clients? Right? They have products they want us to invest in. They have insurance and annuity solutions they want our clients to buy. They're a broker-dealer or a custodian that they want us to house our clients' dollars on their platform. How rare is it that you actually go to a conference and see solutions for us as the advisors? As in, solutions to help make our businesses more successful? Not just different solutions to sell and implement with our clients, but solutions that are actually for us as advisors?
Sadly, the reality is that conferences don't make it possible for us to have a choice. Because when you look at how most conferences are structured, they have one pricing schedule. "Here is the cost of a booth." So the most successful practice management consultants, a new FinTech firm for advisors, and an asset manager with a $100 billion under management, all pay the same conference rate. So what ends up happening? Hundred billion dollar asset managers knock out all the consultants, all the FinTech tools, everything that would help our businesses be more successful as advisors. The solutions for us get crowded out by the big dollars chasing our clients' dollars. In other words, the conference world has had a huge failure to segment its pricing for different markets... and they've allowed products for our clients to crowd out the solutions for us as business owners.
But what happens when a lot of these companies start pulling back their advertising dollars? When the annuity companies, some active funds, non-traded REITs, broker-dealers, all start to dial back over the next year as they try to figure out what their company is going to be in the future? It opens the door for new companies to advertise.
So I'm actually excited about this to see who comes forward to start advertising. What solutions are out there that we've never heard of? I try to highlight a lot new things for all of you here on Nerd's Eye View, but what new solutions are going to come forward that we haven't even seen, because they couldn't afford the advertising until many of the advertisers that had the big dollars pull back after DoL fiduciary?
Can Conferences And Trade Publications Survive With New Solutions Advertisers? - [Time - 8:58]
Now, the bad news. The bad news for conferences and trade publications is that we still have this pricing gap. The companies that provide solutions for advisors just cannot pay the same advertising rates as asset managers, product manufacturers, broker-dealers and the like, because they're just different in size and scale by an order of magnitude. No Fintech startup firm that has an amazing solution for advisors can possibly pay what a $100 billion platform pays in the asset management world. They just do not have he same budgets, and they never will.
So what you're going to see is an interesting shift. A shift in advertising, shift in sponsors, and lots of pressure at conferences and trade publications that are going find themselves with excess inventory, i.e., booths that don't sell, ad space they can't sell.
So watch for ads from publications in the coming months, where the ads just talk about the publication's own stuff. It's called a house ad. It's what they fill in, when they can't get anybody to buy the advertising inventory. And you're going to see a big explosion in those house ads over the next couple of months!
In the Long Run, Conference And Trade Publication Advertising Will Boom - [Time - 10:02]
Notwithstanding all this pressure on industry advertising, and the ripple effects on conferences and membership associations and trade publications, ironically in the long run, I think we're going to see this problem reverse completely.
As I've talked about before, DoL fiduciary ultimately forces companies to back away from distributing based on commissions. The old approach was "We'll get our products out there by paying the best commissions." Instead, if you want to distribute a product to fiduciaries, you have to actually be a good product. Ideally you have to be the best product. Because in a fiduciary world, if you're the best product for the client, then all the advisors will be compelled to use it, because it's truly in the best interests of the client! In other words, we're shifting from who can pay the best commissions to something that looks a lot more like a bona fide meritocracy. For fiduciaries, let what are actually the best products win.
But the challenge here is, we don't always automatically use the best products, even as fiduciary advisors. Because there are a lot of products, and I only have so much time for due diligence, and I can't be aware of everything that exists at once. In fact, the fiduciary rule technically says you don't literally have to give the best possible product on the planet for your client, you have to give a prudent product that a similar expert would have recommended in similar circumstances.
Which means while the fiduciary rule will elevate the high quality products, companies with a high quality product will still have to advertise and get the word out. They'll have to explain "Hey, you may have known us for some other products in the past, but we've got this new product. It's ultra-low cost, it's fee-based. We can work with a wide range of advisors, and we're completely DoL fiduciary-compliant." Advisors won't automatically know; product manufacturers will have to market and get the word out.
How The Fiduciary Rule Will Boost Financial Services Product Advertising - [Time - 11:37]
So what we're ultimately going to see down the road, I think, is actually a massive resurgence of dollar spending on conferences and trade publications, as companies come forward after the DoL dust has settled and to say "We've made a brand new, awesome, fiduciary-centric product, and we've got to get the word out there."
Think of a profession like the medical industry. Where doctors are not paid by drug companies directly. Regulators force that separation. But if you go to a doctor conference, holy cow! If you've never been to one... the amount of advertising that happens from drug companies trying to get visibility to doctors, because the drug companies have to actually demonstrate the product is good... massive advertising spending goes on!
So I think we'll actually see a big resurgence of financial services advertising, but it's going to take some time. But in Q3 and Q4 of 2016 coming up, I think it's going to get really bad for publications and conferences. Some conferences may be okay, because a lot of them actually booked vendors earlier in the year for booths at conferences later in the year. But if they're gearing up for the end of the year, the slowdown will become apparent. And with trade publications, I think we're going to see a big slowdown soon.
Notably, the organizations and the publications that are most RIA-centric will probably fair the best. So RIABiz and NAPFA are looking a whole lot better than most other trade publications and conferences, respectively. Simply because the RIA space has the least change, the least disruption from DoL fiduciary. The major advertisers there, including the big custodians like Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions, are impacted the least by the new DoL rules. The RIA community is probably most sheltered from the disruption, but the rest - including all the publications and conferences that reach them - will have a big slowdown coming in Q3 and Q4 of this year.
And frankly, I think it probably gets worse in early 2017, because a lot of these companies are still committed to their dollars right now based onw hat they budgeted back last year. At the end of 2016, a lot of these companies will do their budgeting for 2017, and their marketing department is going to say, "I don't even know what the heck we're selling until we get past the DOL fiduciary rule in April. In fact, we may not even be certain by then, because there's half a dozen lawsuits against DOL fiduciary..." So companies may wait on their marketing spends to see how the lawsuits settles out. Which means the whole year of 2017 may be really rough for conferences and for trade publications.
By the time we get to 2018, I think the resurgence happens.
But it's going to be new leaders, new product companies that emerge. It's entirely possible that some of today's leading advertisers may not even be doing business in a year. Those names that you see most often in the big pop-up ads that take up your whole screen. I'm not gonna pick on any companies by name, but you know who they are. They may shift their businesses and focus elsewhere. Other companies will come in and take over those full-page ads.
Consolidation Coming For Trade Publications And Membership Associations? [Time - 14:04]
Perhaps the ugliest part of the coming advertising disruption for trade publications and membership associations is that frankly, the space is already too crowded.
One of the reasons I do Weekend Reading for all of you is because I know - as I've heard from you, and experienced myself as well - the number of emails we get from trade publications with the latest articles is overwhelming... so I try to give you the focused list of the best ones.
Likewise, I make my annual best conferences list because there are so many conferences out there, it's hard to pick amongst them and figure out which ones to go to.
In 2017, I think we're going to see a lot of them falter. The advertising dollars are going to shrink away, while everybody figures out how to reposition for a fiduciary future, and a lot of conferences are going get slaughtered, and a lot of trade publications are going to suffer. Some of the smaller ones may vanish. We'll see who survives. But there's going to be a lot of consolidation coming in that space next year.
A Dark Tunnel With A Light At The End - [Time - 15:24]
Now, again, ultimately in the long run, I think we're going to see a new wave of advertising, unlike anything we've ever seen before, when everybody makes their DoL fiduciary-compliant meritocracy product and gets it out there.
But between now and then, there will be a lot of pain. It's an unintended consequence. A secondary effect. The Department of Labor was going after certain advisors, making sure that they're actually selling products in the best interests of their clients. But unwittingly, the secondary effect is that when you take out some of those highest expense products, you hurt the companies that relied on their advertising spends. And in reality, one of the reasons they were high expense products is because they spent lots of money on advertising and distribution, including both commissions to salespeople and also to advertise at trade publications and conference booths. So when the DoL squeezes costs out, the trade publications and membership associations that relied on the advertising also suffer. I'm not even sure it's on their radar screen right now, but it's going to show up soon.
So I hope that's helpful as some food for thought... maybe an angle around DOL fiduciary you hadn't heard or hadn't been thinking about, but I think we're going to start noticing soon.
In the meantime, sorry for the late start on this week's Office Hours with Michael Kitces. We are normally 1 p.m East Coast time on Tuesdays. I should probably call it After Hours with Michael Kitces today. It's about 10 o'clock at night here East Coast Time where I'm recording, but I wanted to get something out for all of you. I'm actually thrilled to see so many of you joined late in the evening here! But thanks for hanging out with me, and have a great day everyone!
So what do you think? Will DoL fiduciary impact conference sponsorships and trade publication advertising? Is that a good thing or a bad thing? How do you expect it will all play out? Please share your thoughts in the comments below!