Newly empowered Republicans in Washington are not retreating from their battle to overturn a new regulation that protects retirement savers from conflicted investment advice. But for the public, the battle is winding down – and the regulators are winning.
New research shows a surge in the number of investors who understand the value of paying for financial planning advice, and a preference for paying a fee rather than commissions on product sales, which often appear to be “free” to the investor but often lead to conflicts that cost them money over time.
And younger investors – who represent the future customers of the advisory business – are more interested in paying for financial help than any other age group, according to a survey by Cerulli Associates, a leading asset management research firm.
Cerulli found that about half of all investors polled late last year are interested in paying for financial advice, up from 40 percent in 2008. But a whopping 79 percent of investors aged 30 to 39 would like to pay for help, as would 73 percent of investors under age 30. By comparison, 54 percent of investors age 40 to 49 said they would pay for financial advice.
Chalk up the positive change of attitudes, in part, to all the attention surrounding the U.S. Department of Labor’s so-called fiduciary rule – set for final implementation in April. It requires retirement advisers to put their clients’ interests ahead of their own by eliminating conflicts of interest on retirement accounts that can lead some brokers to recommend investments that will get them a higher commission or fee.
Many younger savers are flocking to robo-advisory services that offer low-fee fiduciary portfolio management, and some offer full-fledged financial planning. Scott Smith, director of advice relationships at Cerulli. thinks younger retirement savers still will want some level of human interaction with advisers.
“They’re interested in the robo tools, but they want a human backup. People still want to sit across the table with someone they trust and have established a relationship.”
A fast-growing network of fee-only financial planners targeting young investors offers an illustration. XY Planning Network has attracted about 350 financial advisors in less than three years since it started, according to founder Michael Kitces. But he adds that a different payment model is a must. “Young clients pay for advice from their cash flow, not their portfolios,” he says. “So while the demand and opportunity is there, it requires a different business model to serve them.”
Kitces elaborated in an email exchange this week about the Cerulli findings:
The study certainly jives with the demand we’re seeing with XY Planning Network, and it’s part of why we’re seeing such rapid growth.
The caveat is that while the demand is there, it still does NOT fit into the “traditional” assets-under-management model of the industry. Young clients pay for advice from their cash flow, not their assets/portfolios. So while the demand and opportunity is there, it requires a different business model to serve them. I believe that’s the fundamental reason we see the juxtaposition that established firms say they can’t serve younger clientele and/or the younger clients “won’t pay.”
The industry presumed that younger clients “won’t pay” when the truth is just that they need a different WAY to pay. (Though notably, the KIND of advice they need is also different – the industry trains people to do Social Security planning, but a younger clientele needs student loan planning, and the CFP curriculum and industry conferences are almost completely devoid of this kind of educational content for the advisors to meet the advice needs of younger clientele.)
Kitces added that younger clients need the fee-only approach because they don’t have much in the way of liquid investment assets to be managed:
“In many cases, it’s because their money is in a 401(k) that outside advisors can’t manage. In other cases, it’s because the client has high income and high student loans and HAS no investment accounts (but has more than enough income to pay for advice).
Some big brokerage firms are getting on the fiduciary bandwagon [subscription required]. Bank of America Merrill Lynch has been preparing to eliminate all commission-based options for its retirement accounts. Beginning in April – when the rule is scheduled for final implementation – commission-based IRAs will migrate to Merrill’s advisory platform, self-directed brokerage or its robo-advisory service.
But opponents in the financial services industry are still fighting the DoL rule. Last week, U.S. Representative Joe Wilson of South Carolina introduced legislation in the House last week that would delay the DoL rule’s implementation for two years. That would give opponents more time to gut the DoL rule or have it replaced entirely.
Nothing new there – opponents in the brokerage and life insurance industries argue the rule will drive up the cost of getting good retirement advice and leave consumers with access to fewer products. They have fought it unsuccessfully in the courts, and they managed to push through legislation that would overturn it.
Will the Trump Administration repeal the Department of Labor conflict-of-interest rule? That’s not yet clear, although many observers are pessimistic. “I just don’t see how it survives,” said Joshua Gotbaum, a guest scholar at the Brookings Institution and former director of the Pension Benefit Guaranty Corporation. “The business community has campaigned against the rule in the same way that Republicans campaigned against the Affordable Care Act.”
Repeal would remove the rule’s muscle. But I’ve argued that the financial services industry should go ahead and fully implement the rule no matter its political fate in order to embrace a more authentic way of doing business that investors increasingly crave.