Recently the Department of Labor has passed a fiduciary rule which requires all financial professionals to put their clients’ interests before their own when providing advice on retirement account rollovers and selling related services and products. Currently, the broker-dealer model is under threat from the Department of Labor’s new regulation. The rule will likely reduce commissions and result in brokers evolving to financial advisors and fiduciaries; receiving compensation from clients instead of product commissions.
The shift of product salespeople (brokers) to genuine financial advisors is creating a sense of fear within producers across the nation. Under current ruling, brokers can still receive commissions if a Best Interest Contract is signed. Many predict that in the future, commissions will be restricted entirely.
For broker-dealers to survive they must reinvent their business practices. Brokers will eventually be compelled to switch from the distribution of third-party security products to a platform that yields an income for actual financial advice. The professional realm of brokers wasn’t created to provide financial advice to consumers. The primary function of brokers was created to execute securities trades in their own account as a dealer, and to execute securities trades on behalf of customers as a broker. In other words, brokers are hired sales producers. The financial industry has a bad habit of lumping the different financial professionals under one term, “financial advisors.” When we break the functions of brokers, fee-only, and fee-based advisors down, we find that identifying each business practice under the same “financial advisor” umbrella is a stretch. This new regulation is a first step into transitioning brokers to financial advisors.
The White House Face Sheet states that “conflicted advice leads to, on average 1% lower annual returns on retirement savings and $17 billion of losses every year for working and middle class employees.” After that statistic, it’s not surprising that regulation was eventually drawn regarding broker practices. The standards of conduct haven’t been changed for 41 years. Before the 80’s 401(k) plans didn’t exist. Before 401(k) plans employees participated in pension and retirement plans that were provided by the employer. Since then, the dependency on 401ks, IRAs, and retirement accounts has significantly increased, creating the need for regulation and fiduciary responsibility.
Even though brokers will be required to declare themselves a fiduciary, ironically, they will still be able to receive commissions if the previously mentioned contract (BICE) is signed disclosing the details surrounding product purchases. Many thought leaders within the industry predict that new rule might set off future restrictions for brokers.
Only time can tell the future of broker professions. The best broker-dealers will reinvent themselves and adapt to the new investment culture. Brokers who are willing to lean into the slightly uncomfortable transition will successfully adapt and thrive in the same industry, just under different practices. Many brokers will find that switching their business model was a blessing and a more elegant way of functioning. They’ll also begin to act as an entrepreneur instead of a sales producer, providing even more motivation to grow their business.
If you’re a broker, we understand that during this time you might be feeling distraught on how to adapt to the new regulations. We believe that one of the best ways to learn, is to learn from someone who is already successful. True Measure provides support and resources for brokers who are willing to transition to a 7-figure transformation business.
To learn more and get ahead of the game, visit True Measure Wealth Management, fill out the contact us form, and be one of the first in the industry to begin your transformation.