Founder and leader of DALBAR, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Lou will share his insights from inside and outside the industry to help attendees understand and anticipate changes in customers' needs and the ways products are distributed.
Communication Accommodation Theory Kaylyn Benton.pptx
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
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.
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?