Advisor competency standards: The next legislative disruptor

March 16, 2018 by Sean Marus

A team of advisors improve efficiency and baseline competencies at their firm.

about the author:

Sean Marus

Product marketing specialist

With years of experience in product marketing and content generation in the financial services industry, Sean is committed to providing informative and impactful content to financial professionals and the clients they serve.

Ever since the Department of Labor (DOL) introduced legislation in April 2015 requiring a fiduciary standard for individuals providing advice on retirement accounts, the financial services industry has been buzzing.

Financial professionals nationwide were asking the same question: What does this legislation mean for me and my firm? Enterprise organizations, meanwhile, were tasked with determining how to maintain firm-wide compliance standards.

Though the legislation underwent alterations and the implementation date was delayed several times, the ripple of the ruling was felt throughout the industry. Clients were beginning to request transparency into their advisors’ compensation while also demanding compliance with the fiduciary standards.

Once the concept of the fiduciary standard had spread, the legal enactment of the law was merely a formality; the shift in client demands had become an industry-wide standard. Lost in the noise, however, is how the rapid increase of support for the DOL fiduciary rule began and what that can tell us about where the industry is headed.

Groundwork for the fiduciary standard in the United States

Though the DOL rule was a watershed in the history of financial services in the U.S., the legislation was not the first of its kind in the world. In 2012, Australia passed the Future of Financial Advice (FOFA) laws, which were more drastic than their U.S. equivalent. With FOFA, advisors were required to disclose their annual fees, clients were forced to opt-in to their advisor contracts every two years, and — among other provisions — advisor commissions were banned.

The effects of FOFA, paired with the prevalence of DIY financial technology like low-cost index funds and automated robo-advice, have lead to a decrease in prominence of front-load commissions and other advisor fees in the U.S.

Advisor competency standards

If the past is any indication, newly proposed legislation in Australia may lay the groundwork for the future of financial services regulation in the U.S. Slated for enforcement in January 2019, the Corporations Amendment (Professional Standards of Financial Advisers) Act will establish the following items:

  • compulsory education requirements for both new and existing financial advisors
  • supervision requirements for new advisors
  • a code of ethics for the industry
  • an exam that will represent a common benchmark across the industry
  • an ongoing professional development component.

Australian advisors can no longer rest on their laurels in how they operate. Moving forward, increasing efficiencies in compliance workflows and seeking continued education will be paramount to the livelihood of financial services firms.

The future of financial advising in the U.S.

As financial services thought leader Michael Kitces has discussed, the new competency standards in Australia might offer insight as to what is coming next in the U.S. With clients now demanding transparency from their advisors, the next step might be requiring an industry-wide baseline for advisor competency.

This could represent an even more daunting path ahead than adhering to a fiduciary standard. Though DOL compliance is not a push-button challenge, establishing compliance at your firm is more about systems and workflows than trying to hit a moving target. Advisors will have to be much more agile in how they adapt to the ever-changing financial services industry.

It remains to be seen how the landscape of financial advice will evolve and whether competency standards are on the horizon — but much like the DOL fiduciary rule, the implementation of such requirements might only be a formality; the demands from clients could very well become unilateral.

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