DOL Webcast - DOL Fiduciary Rule Impacts Implications_12-04-16

U.S. Department of LaborFiduciary Rule - Impact and implications

Leesemann-Araujo, Beth

Megan- shouldn't this reflect the actual webcast title?

© 2016 Grant Thornton LLP. All rights reserved. 2

• Fiduciary rule overview

• Grant Thornton's perspective

• Industry responses

• Q&A

Agenda


What is the new DOL fiduciary rule?The DOL Rule…• Expands the definition of what constitutes “fiduciary

investment advice”• Covers all financial professionals offering investment

advice to retirement accounts• Precludes advisors from receiving payments that create

conflicts of interest, unless they fall under one of the exemptions outlined in the rule

• Aims to balance protecting retirement savings and minimizing disruptions to industry practices

Timeline• Final rule published on April 6, 2016

• Rule becomes effective on April 10, 2017

• Full implementation of the best interest contract ("BIC") exemption occurs in phases through January 1, 2018

. . . is about fiduciary obligations• Act in their clients' best interest

• No financial incentives that could create conflicts of interest

• Disclosures • Fees and charges; ensure customers are aware

of their right to all fee information• Written documentation that they are acting in

their clients' best interest


What is the new DOL fiduciary rule? (cont.)The DOL Rule does not apply in certain circumstances . . . • When transactions are between independent parties that

have financial expertise• When advisors offer basic education information and not

specific, individualized advice• When non-compensated advice is provided to employees of

a fiduciary• For valuation opinions provided for statutory requirements• For providers of independent platforms which only act as

plan aggregators

. . . and includes key exemptions• Best interest contract (BIC) exemption - In cases

when there is a need to offer protection from certain aspects of the brokerage model that could create conflicts.

• Principal transaction (PT) exemption - In cases when the financial institution is also acting in the capacity of a "principal" and is providing access to debt securities from its own inventory

• Level fee exemption - In cases when the fiduciary charges a fixed fee or a level fee based on a fixed percentage of assets under management


Election results have triggered an uncertainty around the implementation of the DOL fiduciary rule

What we are hearing… …Potential outcomes• Complete revocation

• Defer compliance deadline(s)

• Short implementation delay (< 6 months)

• Long implementation delay (>6 months – 1 year)

• Temporary freeze

• Major/ minor modifications to the rule

Safest course for advisory firms is to move steadily toward meeting the fiduciary regulation

"Congressional Republicans have been urging President-elect Donald Trump to scrap the Department of Labor's fiduciary rule"

"Secretary of Labor Thomas Perez could freeze implementation of the rule pending the appointment by Mr. Trump of a new secretary"

"Trump adviser Anthony Scaramucci promises to 'repeal' DOL fiduciary rule"

"The customer-first principle that’s embodied in this rule has already taken hold in the marketplace, and companies are not going back; they are going to continue to move in that direction."

"…conversations around delaying the rule have taken place on Capitol Hill."

Sources: Investment News, Market Watch, Business Insider, ThinkAdvisor, Financial Adviser


The DOL Fiduciary Rule impacts different types of organizations in distinct and meaningful ways

Business Practices Impacted

• Product Manufacturing – types of products manufactured and associated features

• Product Management – range of products offered; pricing strategies

• Distribution – changing channels based on regulations and need for controls

• Sales Compensation – fee-based vs. commission based; movement towards level set fees

• Customer Experience – emphasis on advice and solutions vs. products

• Advisor Credentials – training, education, accreditation, and hiring

Players Affected

Players Gaining Advantage• Full-service national wirehouses• Discount brokerages/advisory firms• ETF/ passive investment product manufacturers

Players with Mixed Impact• Wealth managers – regional players• Retirement service providers• Robo-advisors (selective)

Players at Potential Disadvantage• Active investment managers• Life insurance and annuity manufacturers• Insurance-only agents & agencies• Insurance field marketing organizations


The DOL Rule calls into focus the challenges facing financial service organizations Features Issues

Product offerings• Types of retirement products offered• Mix of proprietary vs. third party• Product pricing – commission vs. fee-based

Sales channels & practices

• Defining the target customer – can smaller to medium-sized accounts still be serviced profitably?

• Impact on distribution channels• Roboadvisors – not all are created equal

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The DOL Rule calls into focus the challenges facing financial service organizations (cont.)Features Issues

Workforce training & accreditation

• Workforce compensation & incentives – fee-based vs. commission-based• Workforce certifications & training• Required core skills & competencies and impact on hiring needs• Impact on advisor efficiencies & overall profit margins

Business processes & controls

• How to manage risk under a fiduciary vs. suitability standard of care• Risks associated with advisor discretion• Costs/benefits of seeking exemptions under the DOL

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How are organizations responding?

Rationalizing product lineups: Reduce/eliminate products with high commissions; adopt fee-based/level fee compensation models

Seeking strategic partnerships/M&A: Seek out partners to leverage technology, training and resources; sell business units that are too costly to migrate to fiduciary platform

Updating technology: Upgrade/enhance existing technology platforms to aid compliance efforts

Changing compensation structures: Eliminate certain commissioned products; adopt fee-based/level fee compensation models

Flexing operating models: Undertake structural changes to comply with rule (e.g., changing work force mix/training, moving away from advice models, moving clients to roboadvisory or self-directed platforms, creating new supervisory and compliance frameworks, etc.)

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How are organizations responding? (cont.)Description Examples

Rationalizing product lineups

Insurance company Eliminated mutual funds and variable annuities from product portfolio

Broker/Dealer Providing both brokerage-based and fee-based IRAs

Broker/Dealer Narrowing approved list of products, treating both qualified and non-qualified accounts as fiduciary

Seeking strategic partnerships/ M&A

Insurance company Acquired a distributor of annuities to gain access to a flat-fee variable-annuity platform

Fintech company Collaborating with another technology company to develop solutions which automate key documentation functions

Several insurance companies Selling off brokerage businesses

Broker/Dealer Acquired an advisory RIA firm with $4b in client assets to flesh out advisory platform

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Leesemann-Araujo, Beth

For slides 17-19 we cannot reference client names and logos externally unless we have permission. My recommendation is that we do this in a holistic fashion and provide only the examples. No client names can be mentioned.



Updating technology

Fintech company Launched assessment tool to assist advisors in determining their level of DOL fiduciary preparedness

Partnership of software/e-commerce solution companies

Launched new solutions on transaction platforms so distributors can provide fees, expenses, and other related information to advisors

Fintech company Created solution which leverages existing SEC data to allow advisors to show how their fees compare with others

Changing compensation structures

Various broker/dealers and at least one

insurance companyMoving to level fee/ standardized commissions on many products

Various financial institutions & at least

one broker/dealerEliminated commissioned IRAs

Various broker dealers & at least one financial

institutionMaintaining IRA commissions under BIC exemption; want to avoid disruption to advisor network

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Flexing Operating Models

Insurance company Using self-directed customer call center to sell mutual funds, variable annuities

Various Independent Marketing

Organizations ("IMOs")Applying for financial institution status to continue supporting independent agents; designing new supervisory frameworks modeled after an RIA or FINRA model

An insurance company, an FS

consulting company, and an investment research company

Created platforms for advisors to outsource DOL fiduciary responsibilities

IMO Leveraging technology to standardize advice models, sales process, and documentation

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The DOL fiduciary rule may require significant organizational reorientation

M&A, joint ventures & partnering

Achieve scale and/or source new capabilities

Regulatory managementEstablish standard

procedures and controls for a fiduciary-driven model

Business unit strategy & priorities

Implement necessary structural changes to

achieve an advice-driven business model

Talent management & culture

Realign key HR plans -- compensation, hiring,

promotion and training

Product development & innovation

Drive toward need-based solution offerings by customer segments

Product management

Right-range-and-size of open architecture platform

Marketing & distributionEstablish trusted venue

status via a consumer driven omni-channel approach

Customer experienceBranded customer

experience focused on advice and solutions vs.

products

Digital assets

Leverage digital / roboadvisory platforms to deliver advice and gain

operating leverage

Operational scale

Accelerate operational scaling and scoping efforts to

offset incremental compliance cost

Brand and reputationReorient brand on trust and

advice theme

Customer relationships Achieve trusted advisor

status


Please contact us for further discussion or informationDOL FIDUCIARY RULE INITIATIVE - CONTACTS

Johan Joseph | PrincipalFinancial Services AdvisoryT (direct) +1 312 602 8618E [email protected] www.grantthornton.com

Melissa Dimitri | DirectorStrategy & Performance ImprovementT (direct) +1 312 602 8367E [email protected] www.grantthornton.com

Deborah Howard | ManagerFinancial Services AdvisoryT (direct) +1 980 282 1993E [email protected] www.grantthornton.com

DOL Webcast - DOL Fiduciary Rule Impacts Implications_12-04-16

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