The requirement for advisors to better understand the needs and objectives of clients is a core pillar of the US regulatory environment – yet it is now increasingly important for clients themselves to have a firm grasp of the rules under which advisors operate and the different models available.
The regulatory overhaul of the advice market in the UK and Australia, which prescribed advisors to act in the best interests of clients, has come with compliance knock-on costs which not all clients are prepared to pay for. The resulting exodus of consumers has contributed to a so-called “advice gap” in the UK.
So consumers in the US assessing the relative merits of the fiduciary versus suitability standard should understand that extra compliance comes with extra cost.
And if consumers cannot see the value of such advice (harder during choppy markets) or are unwilling to pay for it – then their heads may be turned by cheaper alternatives.
One such cheaper alternative gaining traction in the US is that of robo-advice. Robo-advice is set to become a mainstream offering in the country over the next few years, with the population – especially younger generations – at ease using such offerings.
The rise of robo-advice has been touted as a potential solution to the advice gap in the UK. In the US, where the robo market is more sophisticated, there are signs that advisors are looking to embrace robo rather than view it as a threat.
Advisors may well adopt such robo offerings as complementary parts of a broader advice package. And that may offer something of a solution to consumers grappling over whether to use an advisor or an online offering.
In terms of advice offerings, the debate raging in the US is that of fiduciary versus suitability.
The financial services industry was subjected to a raft of regulations in the wake of the Great Recession via the Dodd-Frank act.
More recently, the SEC put its weight behind the introduction of uniform fiduciary standards for brokers and other financial professionals in a bid to ensure advisors act in the best interests of clients and deliver advice which is not biased toward products carrying high commissions.
The fiduciary versus suitability standard and the fee versus commission model constitute important differences that clients need to understand.
- The fiduciary standard requires advisors to put client interests first and advocate solutions creating the best outcomes for them.
- The suitability standard, which is less stringent, focuses on advisors offering suitable recommendations in line with client objectives. Those operating under the fiduciary standard have a fee-based compensation model which strips out commission.
The fiduciary, fee-based compensation model emphasizes the importance of financial planning and advice. Under the model, advisors are required to offer a greater range of services and products and devise goal-orientated plans.
Some argue that fee-based compensation models are too expensive and drive clients away. This argument is bolstered by the example of the UK in the wake of the implementation of the RDR.
And during times of market volatility – something we have seen a lot of over the last few months – client perspectives can also change.
Some clients become less willing to pay fees during times of heavy market fluctuation, instead turning to the results-driven commission model more geared to short-term performance. And it is in this kind of environment where robo advice can appear an attractive alternative and where the fiduciary, fee-based service can become a hard sell.
But it is precisely during these periods of market flux that clients are often better served by fiduciary advisors who place a greater emphasis on reaching long term objectives and are not swayed by the lure of commissions.
Ultimately, the onus must fall upon consumers to examine their investment strategies and evaluate whether the fiduciary or suitability standard, or indeed robo-advice, is best suited for them.
And this will require an understanding of the regulatory environment – something in which advisors are well-versed!