In light of the pending Department of Labor (DOL) fiduciary rule set to take effect in June, J.D. Power recently surveyed more than 1,000 investors to find out their thoughts about the new rule and its potential impact on their own circumstances. Much to the surprise of the industry, the majority of full-service, commission-based investors are not too keen on switching to a fee-only plan.
Financial advisors and broker-dealer firms were caught off guard by the results of the survey, primarily because the industry generally accepts the fiduciary rule is good for both firms and their clients. The fiduciary rule actually encourages advisors and brokers to do the best they can to create growth – because they are paid based on the value of their clients’ funds.
So why are fee-based clients afraid of the fiduciary rule? That is the question we are all trying to answer right now. Thankfully, implementation of the rule was delayed until June. That gives us more time to wrap our brains around the fact that 60% of our commission-based clients do not want to go to a fee-only structure.
Perhaps the first thing that is scaring investors is the idea of their advisors or brokers implementing a mandatory shift to the fee-only model. According to the J.D. Power survey, some 19% indicated they would ‘definitely’ not stay with their current firms should those firms implement a mandatory switch. An additional 40% reported that they would ‘probably’ not stay with their current firms. Only 8% acknowledged plans to stick with their firms should a transition take place.
It would appear as though making the switch to a fee-only platform mandatory is bothersome to commission-based clients. This should not surprise anyone. Making anything mandatory ruffles feathers, whether you’re talking about paying financial advisors or wearing seat belts. People just don’t like to be told what they must do.
If broker-dealers and their advisors gave clients an opportunity to choose, those who would otherwise walk away might be enticed to stay. They might even be tempted to eventually make the transition to fee-only.
It should be noted that the research uncovered a nearly universal desire among investors for more transparency among their advisors and brokers. When transparency and flexibility enter the equation, respondents are less likely to come down on one side of the rule or the other.
It could be that commission-based clients do not think they will enjoy as much transparency or flexibility under a fee-only system. On the other hand, getting rid of commissions forces advisors and brokers to go the extra mile to ensure maximum growth with every passing quarter. Why investors don’t equate this with transparency and flexibility is unclear.
It could be that all of this is about nothing more than change. In other words, people are inherently afraid of change no matter the area of life in which they experience it. It is reasonable to suspect that commission-based investors are so used to the way they have always done things that they are not willing to embrace something new. The DOL fiduciary rule represents a whole new way of dealing with financial advisors and brokers that clients just don’t want to get involved with.
For now, the fiduciary rule has been put on hold until June. There are rumors that the Trump administration could simply do away with it altogether. If so, the J.D. Power research becomes moot. If not, it’s imperative that broker-dealers and advisors figure out why commission-based clients are so afraid of the fee-only model.