He manages content development, strategy and maintenance for the Advisor Briefcase application. He believes educating clients is key to unlocking an advisor’s potential and enjoys looking at the economics of everyday life.
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The DOL rule is creating more curious clients
As everyone in the financial industry knows by now, the DOL rule is set to bring major changes to the way advisors recommend commissioned investment products. Starting in April 2017, “transparency” and “best interest” will become industry standards, and clients will be entitled to see the commercial details of the products they are purchasing.
At the moment, the push for transparency from the DOL has only gone as far as dragging commission-based financial advice into the public spotlight. News of the coming fiduciary standard has appeared on nearly all major media outlets, even getting discussed on popular television and radio talk shows. The secret is out, and many clients want to know if they have received financial advice that was not in their best interest.
Until institutions, firms, and advisors have prepared for DOL compliance, however, this newfound curiosity in the financial industry may only serve to create some awkward (or demanding) questions for advisors — where even the most virtuous advisors can quickly feel like they are being put on trial.
So what should you do when clients ask for details about commissions and the DOL?
5 things to do when clients request commission information
- Remember that clients feel anxious, confused, and exposed.
Think about the situation from the perspective of your clients: they do not understand how every investment works, but have just discovered their advisor may be prioritizing commissions over their well-being. They probably want to trust you, but may feel unnerved or foolish because they did not realize you could have taken advantage of their ignorance in the past. The best thing to do is show them that you have nothing to hide and that you are willing to answer whatever questions you can.
- Make it clear that commissions are part of the industry and paid from fees charged by the investment company – they are not set by you.
Honesty is the best policy. In situations where a client asks about advisor compensation, it is fine to be direct about the general process. Insitutions charge investors fees for the purchase of their products; the institution keeps some of the fees for management costs; and they pay out some of the fees as commissions so that advisors have a job. Without a commission system, there is no one to sell the investments or provide recommendations to people that need them. Commissioned investments were created to fill a particular need of the industry.
- Depending on the needs of the client, explain how commissioned investments can be extremely efficient for investors that do not need much management.
Although each client’s needs and financial options are unique, an investment that charges an upfront fee can cost an investor less money than investments managed by an advisor that charges an annual fee. Commissioned products can be extremely efficient for investors that do not have any special investing needs and do not plan to change their investment strategy. The financial requirements of commissioned products also tend to be drastically lower than those of fee-based managers, making investments more accessible to people with relatively few assets.
- Make sure clients understand that just because advisors have not been required to act in the client’s best interest, it does not automatically mean they have been abusing their role.
This defense is simple and true. The DOL rule will require advisors working with retirement accounts to act as fiduciaries; however, adding a requirement does not mean every advisor was not already acting in their clients’ best interests. Talk to your clients and spell out your personal standards for conduct. A client-advisor relationship is based on trust, and advisors should let their past recommendations speak for themselves.
- Be proactive and lead the discussion.
No advisor can be successful without strong client relationships. As news of the DOL rule continues to alert consumers of the potential abuse of client-advisor relationships, misinformation and misunderstanding could eat away at client trust. For advisors subject to the new rule, it is best to be educated and forthcoming. If possible, bring up the topic before clients even ask; talk to them about the changes they can expect to see and offer to provide additional updates. Although it may be inconvenient (and possibly uncomfortable) to discuss the situation, it is better to have an open conversation than a group of clients whose concerns and suspicions go unaddressed.
The DOL rule may bring a lot of changes in an advisor's business, but it may bring even more questions from current clients. Advisors need to be prepared to have these discussions and be transparent with clients regarding the integrity of past and future recommendations.