The retirement-services space has reached the point of creative destruction, where innovation eliminates old businesses and creates new ones.
Why are so many in the financial services space on the wrong side of industry evolution, complaining that the DOL's new fiduciary standard will be detrimental to their way of doing business?
The Department of Labor's final ruling showcases how an entire industry — one that claims to be committed to people's financial well-being — will continue trying to convince retirement savers that they are better off in an industry rife with conflicts of interest, sky-high commissions and questionable revenue-sharing arrangements.
As the controversy brews and lawsuits are prepared, advisers can rest assured that tools exist to help them comply with the new ruling in its current form. In fact, some have said that it's due to the advent of new technology that the DOL can demand the new levels of transparency laid out in the ruling. Said writer Alessandra Malito in a recent InvestmentNews article, “The final rule won't just change the way advisers charge their clients, it will put software at the center of meeting compliance goals.”
New technology is radically changing the financial services landscape, providing low-cost access to retirement savings products, automated retirement-funding advice that simplifies investing, and fee transparency that is leveling the playing field for all retirement investors.
In fact, the retirement services space has reached the point of creative destruction, where innovation eliminates old businesses and creates new ones.
NEW OPPORTUNITY
This is not a new phenomenon. Since the dawn of the Industrial Age, businesses have come and gone as new technologies emerged. Companies unable to compete have gone down swinging.
Yet adapting to new market forces that bring about creative destruction often yields dramatic outcomes. Consider Netflix, the DVD subscription service that managed to capitalize on digital innovation by leveraging mobile technology and faster internet speeds to shift their entire business model, becoming one of the largest video-distribution networks in the world.
And then there is the impact of technology on the publishing industry. The Internet, on-demand printing and electronic books have radically changed how information is distributed and consumed, transforming hundreds of years of previous industry innovation.
Now digital media is flourishing. Yet even as the traditional print business has suffered, creative disruption is driving newspapers and other publishers to adopt new business models to stay relevant and profitable.
DISRUPTING ADVICE
Viewing the new DOL ruling in this context, is the retirement provider universe really going to implode? Losing significant numbers of clients and revenues? Disruption doesn't have to be cataclysmic. As we've observed in other industries, regulatory changes and technological innovation can be disruptive to business as usual, but the results often can be beneficial for companies and their customers.
Advisers, plan sponsors and mutual fund companies have been presented with a challenge to increase transparency and create more fairness in their fee structures for investors. The technology to help them accomplish this currently exists.
Many in the financial services industry have already made adjustments to their businesses. Charles Schwab has added robo-adviser elements to its platform. Others have slashed their commission structure, opting for more realistic margins in a new fee-based paradigm over the sizable gross margins they once enjoyed.
CONTINUING EVOLUTION
As the U.S. retirement-funding crisis gains momentum, any initiatives to protect everyday investors and maximize savings — from expanding the definition of fiduciary to providing quality, low-cost robo-advice — is a good thing. Whether service providers are prepared or not, this is likely the beginning of a continuing evolution in the business of retirement advice.
For providers in the retirement-service ecosystem, adapting to the new rules and recognizing they can still compete is the first step. Those who are willing to adopt new technologies or partner with the companies that offer them will thrive under the new DOL regulations because one thing is certain: The long-awaited overhaul of the retirement services industry has only just begun.
Bob Ward is the chief revenue officer at Vertical Management Systems Inc., a technology provider of processing, controlling and account aggregation technology.
