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DALBAR, Inc.
303 Congress Street, Boston, MA
617.723.6400 www.DALBAR.com info@DALBAR.com
Transformational Change in the
Investment Management Industry
Louis S Harvey
DALBAR, Inc.
DALBAR
Another Point in Time –Late 1980’s
Situation Transformational
Event
Result
High Interest Rates
Wire Houses Sell Mutual
Funds
Wire Orders Boom
Market Crash
Back Office Chaos
Connect Mutual Funds and
Broker/Dealers
Electronically
NSCC FundSERV and
Networking Evolves
Massive Growth
Distribution Channels
Mutual Funds Become
Mainstream
New Product Structures
Omnibus Accounts
Investment Only
401(k) Recordkeeping
ProfitfromaSuperiorStandardofCare!
DALBAR
Situation Today…
 Active versus Passive Management
 Litigation Threats
 Product Pricing and Compensation
 DoL Fiduciary Rule
 SEC Regulatory Normalization
 Alternative Investments
 Advisors as Managers
 Retirement Reform
DALBAR
Transformational Event
Sell
Primary objective
Incentive
compensation
Advise
Incidental to
revenue activity
No fee from client
Sell
Objective
Incentive
compensation
Sell
Objective
Incentive
compensation
Advise
Artificial
Intelligence
Low cost to client
Separation of
Client Management
from Investment
Advice
DALBAR
Transition by Regulation
Paid to Sell
Paid to Advise
DALBAR
Value Proposition
Product:
Makes Money
Advice:
Costs Money
DALBAR
Regulation
Product:
SEC, Finra, States
Advice:
DoL? IRS? SEC?
DALBAR
Why a Fiduciary Rule?
Old rule was so easily circumvented
that it was totally ineffective:
• “Here are five ways to avoid
being a fiduciary”
…Pick one
…Any one
• Result: 100s of thousands of
non-fiduciaries
…All out of the reach of
retirement regulators
• Offer “Audited Advice”
…No takers, easier to
circumvent
New rule: Any one fact makes you a
fiduciary:
• But that was too extreme
…Business could not function
…Withdrew proposal
• Re-proposal: Just sign a contract saying
you will be good
…Transfer regulation to local courts
…Cut advisor compensation to protect
investors
• Left “Audited Advice” on the table
DALBAR
Alternatives for Compliance
Fiduciary
Rule
BICE
No
Conflict
Fee
Leveling
Computer
Model
Special
Exemption
“Exemptions, including this class
exemption [BICE], simply provide
a means to engage in a
transaction otherwise prohibited
by the statutes.
The conditions to an exemption
are not equivalent to a
regulatory mandate that
conflicts with or changes the
statutory remedial scheme.”
If Advisers or Financial Institutions
do not want to be subject to
contract claims, they can
(1) change their compensation
structure and avoid committing a
prohibited transaction,
(2) use the statutory exemptions
in ERISA section 408(b)(14) and
section 408(g), or Code section
4975(d)(17) and (f)(8), or
(3) apply to the Department for
individual exemptions tailored to
their particular situations.
DALBAR
BICE Seven Deadly Threats
7
Advisors
Replaced
by
Technology
1
Compensation
Cuts
2
Regulation
by
Litigation
3
Cost of
Transition
and
Operation
4
Transform
SALES
people into
SERVICE
people
5
Erosion of
Advisor
Base
6
Provider
Revenue
Lost1. Compensation may not be excessive, or
differentiated… $17 billion cut promised
2. Enforceable contract, must permit class
action… listed with DoL (easy target)
3. New advisor tasks, systems, operations
4. Compensation applies only to services,
not to sales or client management
5. Lower compensation but more work
6. Providers lose the advantage of support
7. Robos get a free ride with level fee
DALBAR
Advisor’s View of Competing Exemptions
Activity BICE
Computer
Model
Define services provided to each retirement client 
Find excess and cut compensation by April, 2017 
Training required for new exemption process  
Process new clients and changes using exemption  
Test all new business for compensation compliance 
Document basis for each new recommendation 
Perform periodic review and revise portfolio  
DALBAR
Cost* Comparison
Start-up* Next Year*
BICE ($1,648,250) ($2,744,125)
% of Retirement
Revenue (13.2%) (22.0%)
Computer Model ($370,000) $619,125
% of Retirement
Revenue (3.0%) 5.0%
*Costs include both expenditures and lost revenue
Key Assumptions Used in Model
250 Advisors (80% with IRA
or ERISA clients)
Gross Retirement Revenues
of $12,500,000 (20% of total)
-30%
-20%
-10%
0%
10%
BICE Computer Model
Start-up Next Year
DALBAR
Computer Model Solutions
Hand Over Accounts
Unprofitable accounts are
“sold” to Robo Advisor.
PRO
Relief from burden of
small accounts.
CON
Loss in compensation
from BICE limits on
profitable accounts.
White Label Robo
Robo Advisor uses Advisor’s
identity to service account.
PRO
Maintain visibility with
transferred accounts.
CON
Loss in compensation
from BICE limits on
profitable accounts.
Avoid BICE
Advisor/firm leases Robo
and certifies it.
PRO
All clients on computer
model for reduced
burdens and risks.
CON
Requires certification
and audits.
DALBAR
Effect on Investment Managers
Quantitative
Versus
Qualitative
• Investment selections are
made on basis of rules.
Realign Share
Classes
• Compensation must be
realigned with services
being funded.
Replace
Value-Add
Services
• Value will be found in
support to navigate BICE.
Add IRA to
Retirement
Channel
Number of
advisors involved
in the retirement
channel will grow
by multiples.
DALBAR
Supporting Computer Models
Data
Feeds
Phone
Center
Digital
Media
Different Service Audience
• Robo operators
• Advisors using Computer Models
• Clients working with Computer Models
Different Knowledge Requirements
• Types of arrangements
• Regulatory boundaries
• New types of issues/problems
ProfitfromaSuperiorStandardofCare!
DALBAR
Forecast…
 Active versus Passive Management
 Litigation Threats
 Product Pricing and Compensation
 DoL Fiduciary Rule
 SEC Regulatory Normalization
 Alternative Investments
 Advisors as Managers
 Retirement Reform
In my humble
opinion!
DALBAR
Questions?
Frequently Asked Questions:
Explain the other alternatives for complying with the Fiduciary Rule
Why is technology described as a threat but later presented as a solution?
Why do you say BICE has compensation limits?
Does grandfathering prevent the loss of business from BICE?

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Louis S. Harvey, President & CEO, Dalbar, Inc.

  • 1. DALBAR, Inc. 303 Congress Street, Boston, MA 617.723.6400 www.DALBAR.com info@DALBAR.com Transformational Change in the Investment Management Industry Louis S Harvey DALBAR, Inc.
  • 2. DALBAR Another Point in Time –Late 1980’s Situation Transformational Event Result High Interest Rates Wire Houses Sell Mutual Funds Wire Orders Boom Market Crash Back Office Chaos Connect Mutual Funds and Broker/Dealers Electronically NSCC FundSERV and Networking Evolves Massive Growth Distribution Channels Mutual Funds Become Mainstream New Product Structures Omnibus Accounts Investment Only 401(k) Recordkeeping
  • 3. ProfitfromaSuperiorStandardofCare! DALBAR Situation Today…  Active versus Passive Management  Litigation Threats  Product Pricing and Compensation  DoL Fiduciary Rule  SEC Regulatory Normalization  Alternative Investments  Advisors as Managers  Retirement Reform
  • 4. DALBAR Transformational Event Sell Primary objective Incentive compensation Advise Incidental to revenue activity No fee from client Sell Objective Incentive compensation Sell Objective Incentive compensation Advise Artificial Intelligence Low cost to client Separation of Client Management from Investment Advice
  • 5. DALBAR Transition by Regulation Paid to Sell Paid to Advise
  • 8. DALBAR Why a Fiduciary Rule? Old rule was so easily circumvented that it was totally ineffective: • “Here are five ways to avoid being a fiduciary” …Pick one …Any one • Result: 100s of thousands of non-fiduciaries …All out of the reach of retirement regulators • Offer “Audited Advice” …No takers, easier to circumvent New rule: Any one fact makes you a fiduciary: • But that was too extreme …Business could not function …Withdrew proposal • Re-proposal: Just sign a contract saying you will be good …Transfer regulation to local courts …Cut advisor compensation to protect investors • Left “Audited Advice” on the table
  • 9. DALBAR Alternatives for Compliance Fiduciary Rule BICE No Conflict Fee Leveling Computer Model Special Exemption “Exemptions, including this class exemption [BICE], simply provide a means to engage in a transaction otherwise prohibited by the statutes. The conditions to an exemption are not equivalent to a regulatory mandate that conflicts with or changes the statutory remedial scheme.” If Advisers or Financial Institutions do not want to be subject to contract claims, they can (1) change their compensation structure and avoid committing a prohibited transaction, (2) use the statutory exemptions in ERISA section 408(b)(14) and section 408(g), or Code section 4975(d)(17) and (f)(8), or (3) apply to the Department for individual exemptions tailored to their particular situations.
  • 10. DALBAR BICE Seven Deadly Threats 7 Advisors Replaced by Technology 1 Compensation Cuts 2 Regulation by Litigation 3 Cost of Transition and Operation 4 Transform SALES people into SERVICE people 5 Erosion of Advisor Base 6 Provider Revenue Lost1. Compensation may not be excessive, or differentiated… $17 billion cut promised 2. Enforceable contract, must permit class action… listed with DoL (easy target) 3. New advisor tasks, systems, operations 4. Compensation applies only to services, not to sales or client management 5. Lower compensation but more work 6. Providers lose the advantage of support 7. Robos get a free ride with level fee
  • 11. DALBAR Advisor’s View of Competing Exemptions Activity BICE Computer Model Define services provided to each retirement client  Find excess and cut compensation by April, 2017  Training required for new exemption process   Process new clients and changes using exemption   Test all new business for compensation compliance  Document basis for each new recommendation  Perform periodic review and revise portfolio  
  • 12. DALBAR Cost* Comparison Start-up* Next Year* BICE ($1,648,250) ($2,744,125) % of Retirement Revenue (13.2%) (22.0%) Computer Model ($370,000) $619,125 % of Retirement Revenue (3.0%) 5.0% *Costs include both expenditures and lost revenue Key Assumptions Used in Model 250 Advisors (80% with IRA or ERISA clients) Gross Retirement Revenues of $12,500,000 (20% of total) -30% -20% -10% 0% 10% BICE Computer Model Start-up Next Year
  • 13. DALBAR Computer Model Solutions Hand Over Accounts Unprofitable accounts are “sold” to Robo Advisor. PRO Relief from burden of small accounts. CON Loss in compensation from BICE limits on profitable accounts. White Label Robo Robo Advisor uses Advisor’s identity to service account. PRO Maintain visibility with transferred accounts. CON Loss in compensation from BICE limits on profitable accounts. Avoid BICE Advisor/firm leases Robo and certifies it. PRO All clients on computer model for reduced burdens and risks. CON Requires certification and audits.
  • 14. DALBAR Effect on Investment Managers Quantitative Versus Qualitative • Investment selections are made on basis of rules. Realign Share Classes • Compensation must be realigned with services being funded. Replace Value-Add Services • Value will be found in support to navigate BICE. Add IRA to Retirement Channel Number of advisors involved in the retirement channel will grow by multiples.
  • 15. DALBAR Supporting Computer Models Data Feeds Phone Center Digital Media Different Service Audience • Robo operators • Advisors using Computer Models • Clients working with Computer Models Different Knowledge Requirements • Types of arrangements • Regulatory boundaries • New types of issues/problems
  • 16. ProfitfromaSuperiorStandardofCare! DALBAR Forecast…  Active versus Passive Management  Litigation Threats  Product Pricing and Compensation  DoL Fiduciary Rule  SEC Regulatory Normalization  Alternative Investments  Advisors as Managers  Retirement Reform In my humble opinion!
  • 17. DALBAR Questions? Frequently Asked Questions: Explain the other alternatives for complying with the Fiduciary Rule Why is technology described as a threat but later presented as a solution? Why do you say BICE has compensation limits? Does grandfathering prevent the loss of business from BICE?