About the Rubicon… In the winter of 49 BC, Julius Caesar led his army over the Rubicon River, leaving Gaul and entering northern Italy. In doing so, he was committing treason. It was during the crossing he said: “The die has been cast.” Caesar knew there was no turning back.
Last week the asset management industry’s ears and eyes were focused on Washington D.C. as President Trump signed an Executive Order calling for an examination of the Department of Labor’s (DOL) “Fiduciary Rule”.
We cannot pinpoint to which extent the Trump administration might delay, revise, or rescind the work of its predecessors. However, regardless of any final action, we believe that the essence of the fiduciary standard is going to stay embedded in clients’ expectations. The spirit of it will live on.
Make no mistake: if the ruling is repealed, potential legal hazards to the industry could diminish. If this occurs, the shift to low fee products as well as more transparency and investor protection could persist. The rulemaking and thought process behind it have gone too far to walk it back. It crossed the Rubicon.
Business Strategies for Asset Managers
The industry could take varying approaches to adapt to lower fees, increased transparency and enhanced investor protection. These trends will remain as headwinds regardless of the fate of the DOL’s Fiduciary Rule. As such, firms could consider implementing the following business strategies.
1. Focus on Performance
The ability of a firm to garner a reputation as a consistent alpha producer will always be a competitive advantage. Further, if the DOL’s fiduciary standard survives, advisors could feel more comfortable investing their clients’ assets in products with consistent track records of benchmark-beating performance.
2. Invest in Product Innovation
Asset managers that offer a suite of low cost products should be well positioned regardless of the destiny of the DOL ruling. As financial advisors migrate from commission-based accounts to fee-based solutions, there is an attractive method to keep costs down. That is: allocate clients’ assets into low cost funds and ETF’s.
Furthermore, clients who don’t have enough investable assets for fee-based accounts or are adversely affected by the increased cost of advice in a fee-based model have a potential alternative. That is: use digital advice platforms such as robo advisors, whose algorithms leverage low cost products, such as ETF’s.
Launching low cost products is the first step. The second is to confirm that offerings add incremental value to clients. For example, providing tools to help educate clients as well as enhancing their experience through integrated intuitive mobile and web platforms could help differentiate asset managers.
3. Strengthen Relationships with Distributors
A potential impact of the DOL’s fiduciary rule could be a culling of the number of mutual funds and fund families that intermediaries offer on their platforms. To that end, asset managers should, at the minimum:
- Offer products that are consistent alpha generators relative to their benchmarks
- Collaborate with distribution partners to align product and platform
- Strengthen the brand by transitioning to a client-centric distribution model by leveraging digital, data and analytic capabilities to better understand both end consumer and financial advisor needs
4. Diversify Revenue Streams
Over the past several years, more and more asset managers have been investing in both their institutional and international offerings. The institutional segment keeps growing as investors seek solutions to meet their needs and generate consistent performance. Firms also continue to build global capabilities to capture new opportunities. Asset managers with strategic priorities in both the institutional and international space could be well positioned. That’s because the fiduciary rule does not directly impact either one.
5. Optimize Operating Model and Technology
Operating models present asset managers with a means to realize cost savings. The play here is to optimize them. This renewed focus on cost management as well as the proliferation of data and analytics and the development of complex investment products presents massive challenges. There are also areas of opportunity. By integrating systems and processes, asset managers can eliminate silos. In the same way, they can upgrade or replace legacy systems and build a new reporting functionality.
For the asset management industry, 2017 is a new frontier shrouded in regulatory uncertainty. However, through resilience and agility, firms could evolve. Success hinges on adapting to the landscape. That is: lower fees, increased transparency and a higher standard of investor protection. All are here to stay. DOL fiduciary rule or not, asset managers need the right strategies for this new terrain.