Regulators and Technology: A Double Whammy on Financial Advice
The Department of Labor recently issued rules governing the standards for providing financial advice to holders of ERISA accounts. There are nearly 1,300 pages of new rules and guidelines to digest, but the quick takeaway is that the standards and liabilities associated with providing financial advice to qualified accounts have increased—markedly.
One major implication is cost. Can we safely assume that cheaper is better? That is the message these rules appear to suggest about financial advice. Add to this regulatory concoction the ingredients of commoditized advice and cheap, passive investing made possible by technology and financial engineering. The result is mounting cost pressures for financial advisors.
May I just point out the contradictory notion that compliant advice under DOL guidelines—especially in the instance of many low-cost providers—practically ensures that the extent of knowing an investor would be limited to a handful of questions about age, income and risk tolerance? Is that what the new standards are really about … shortcuts? If so, we need not worry about them. But my suspicion is that the standard is meant to be higher than that—and it should be.
Since regulatory pressures and technological advancements are not likely to let up anytime soon, we are left with the question of how to provide quality advice to clients at a fair price. And what is that price?
The answer lies in the same process that almost every other product or service is valued and priced. If I buy a new car, do I want a sunroof, all-wheel drive or any of hundreds of other options? Some of those options may increase the level of safety like anti-lock brakes while others are elective and relate to driver comfort. The government sets the minimum standards for vehicles, but consumers are free to choose the level of comfort, performance or safety they desire. And they pay more or less depending on the value they ascribe to these options.
As financial advisors, we can define for clients the minimum standards that regulators and our firms impose on investors and the cost that entails. We may also want to illustrate the variety and depth of services we can provide beyond that, and the respective costs, as well as the level of liability the RIA or broker-dealer assumes in each scenario.
If this onslaught of regulation and technology continues, we might also consider framing with our clients the nature and extent of the relationship they desire. The higher the accountability standard they want, the higher the costs they will necessarily pay.
In the end, it is simply a fallacy to assume that cheap can ever equate to quality. One thing I have learned after nearly 30 years in this business is that there is no free lunch.