Revenge of the Nerds (all thanks to the DOL)

An amazing thing just happened in the industry. Regulatory changes aren’t always a benefit to advisors (and sometimes they’re downright detrimental to business), but the DOL fiduciary rule should have every fiduciary-focused advisor jumping for joy.

At long last, consumers are hearing about the value of a true fiduciary. The hedge fund scandals that rocked the investment world over last decade should have woken them up long before now, but it took April’s highly anticipated ruling to bring fiduciary responsibility to the front page. People who may have never even heard the word “fiduciary”—much less understood what it meant—are now chatting about it over cocktails. And they’re finally getting it.

Within the financial services industry, this means that, finally, the “nerds” are getting the spotlight, and these smart, client-focused advisors are poised to reap their just rewards. Rewards for consistency. Rewards for paying close attention not to big-bang returns, but on the true needs of their clients. Rewards for delivering consistent, reliable results year and year after year. Sure, this type of deliverable doesn’t sound as sexy as the 20% return on investment that flashy advisor down the street has been promising for years (while he calmly assures his clients that the recent down market is just an anomaly), but it’s real. It’s tangible. And better yet, it’s what your clients actually need.

For advisors, it’s a shift that has the potential to have a major impact on the growth of your practice. First, you’ll no longer be forced to compete with that flashy, non-fiduciary advisor. If the DOL didn’t outright close his doors, they’ve certainly thrown a wrench in the spokes, and it’s going to take some time to adjust to this new, required model. Second, it opens up a valuable opportunity to demonstrate to clients and prospects alike how, as a fiduciary, your process is inherently outcome-oriented. Rather than seeking unrealistic returns, your focus is on growing and protecting their assets. Rather than seeking alpha regardless of risk exposure, you focus on building a tailored portfolio based on their specific goals and risk tolerance. And while you can’t promise a 20% return, your clients and prospects finally know that no one can deliver on that promise. Even more, they never could.

Of course, even as a fiduciary, the DOL rule includes an increase in regulatory, compliance and risk oversight that can feel daunting, and it’s easy to fall into the trap of focusing on all the things you shouldn’t be doing. Instead, I urge you to consider focusing on the things you can be doing to demonstrate consistency and due diligence in your role as a fiduciary.

1. Deliver the investment experience your clients want—nothing more, nothing less.

Having investments perform as expected is paramount to success in today’s environment. As a result, proving your expertise as an advisor has little to do with “achieving big alpha” and everything to do with delivering the results your clients want. What you may find is that few clients actually expect alpha—or excess returns relative to the return of the benchmark index. In fact, I would argue that there is elegance in achieving zero alpha above the compensated risk your client is seeking. Yet there’s always that temptation to outperform.Think about it: your client comes to you seeking a domestic portfolio with no international exposure, so you place her in a fund that’s not a pure exposure model and has achieved alpha in the domestic space for five years running. You later learn there actually was some international posture in these products, and that exposure was responsible for the alpha over the domestic benchmark. Is it better to produce alpha (after all, every client loves big numbers!), or better to fulfill your fiduciary responsibility to your client and maintain the exposure she requested?

No matter how tempting it may be to outperform and be a rock-star advisor, stick to your fiduciary duty and deliver what your clients ask for—even when the big alpha is out there like a carrot on a stick.