With the new Department of Labor fiduciary rule looming, there are six simple steps broker-dealers need to take to thrive in a tougher fiduciary climate. Outlined by Ron Rhoades, program director for the financial planning program at Western Kentucky University, these include:

  • Adopting a strategy to understand fiduciary status, its rationale and duties
  • Embracing the need for a new vision and a new mission
  • Promoting a fiduciary culture within their firm
  • Implementing the appropriate strategy and tactics
  • Promoting and marketing all this to clients, encouraging their feedback and making adjustments.
Photo: Bloomberg

In keeping with this, Rhoades suggests that advisers rethink how they’re getting paid and discontinue building their business around commissions or 12b-1 fees. “I think over the long term, the fiduciary culture is going to win out over a sell-side culture,” he says, noting that at present fee-based revenue accounts for at least half of all BD compensation.

Those who adapt to the new environment will gain market share and maintain high profitability, Rhoades predicts, while those who fail to make the transition will see their revenues fall, their resources shrink and will ultimately be forced to merge with or be acquired by another firm. And while top-line revenue may fall for BDs, so will their expenses as they outsource more of their back-office infrastructure and proprietary applications to comply with the new fiduciary standards.

Most of this, Rhoades says, will occur whether or not the Labor Department’s fiduciary rule governing conflicts of interest is delayed, which he deems unlikely, or a Republican seeking to repeal such action becomes president. For whatever the rule’s outcome, the financial planning expert argues that consumers will gravitate towards advisers without conflicts of interest who have better investment strategies in place.

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"Over the long term, the fiduciary culture is going to win out over a sell-side culture."

Rhoades, who’s also an attorney, cautions BDs about seeking guidance from law firms with whom they’ve had a longstanding relationship and who have a history of providing advice on how to avoid fiduciary status. Many larger law firms that advise BDs are “missing the boat on this whole issue and when you can terminate fiduciary status,” he observes. “To some degree, they may have been led down that path by the SEC, and in some respects, it’s just wishful thinking.”

His point is that outside legal sources could provide a new and refreshing perspective. To gauge their understanding of the issue, he suggests holding discussions on “the consequences of the presence of a conflict of interest in a fiduciary-client relationship,” as well as “the nature of waiver and estoppel under a bona fide fiduciary relationship.”


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