In the United States, the Department of Labor (DOL) Fiduciary Rule doesn’t just affect the brokers and financial advisors of 401(k) plans; there are implications for asset managers and their administrators, too. However, while employers and brokers face new restrictions, the DOL regulation is far from bad news for the buy side – and could even be a catalyst for innovation.
The Fiduciary Rule won’t come into effect until April 2017, but its impact on the sell side is already clear. Rather than just meeting the previous “suitability” standard, brokers and registered investment advisors (RIAs) must now show that their 401(k) plan recommendations are truly in the “best interest” of plan sponsors and participants.
What’s more, to ensure objectivity and to avoid conflicts of interest, brokers can no longer earn commission as financial advisors of retirement plans. In other words, the game has changed –brokers no longer will be able to recommend the products that pay them the most.
While less directly affected by the rule, the buy side will play an important role from the sidelines: part-statistician, part-cheerleader, if you like. In a crowded marketplace, it’s always been a challenge for asset managers to get their funds into distribution channels. Now, in the spirit of the Fiduciary Rule, they will be unable to offer financial incentives, such as fee sharing; instead, they must rely on demonstrating the performance of their fund and proof of strong returns.
That means providing even more of the transparency that regulators and investors are already demanding – for deep, real-time portfolio insight.
Fund administrators will be key to meeting this requirement as transparent asset management in turn depends on transparent fund administration. In fact, according to new research by FIS , 49 percent of fund administrators believe the pressure to provide greater transparency will affect them the most between now and 2020, after regulation.
With a totally transparent view of the value of each portfolio, brokers and RIAs will be better equipped to prove that institutional investors and plan participants are getting the best investments to secure their future. This will effectively drive them to recommend the actively managed portfolios that offer true outperformance while fitting their customers’ investor profile.
Reaping the rewards of greater inflows, there will be more impetus and demand to innovate and create more attractive active products, potentially incorporating a wider range of alternative assets. Paradoxically, thanks to their strong performance in recent years, there could also be increased reliance on passive exchange traded funds (ETFs).
Whether through active or passive funds, innovation at product level will require innovative and highly automated fund administration solutions. Currently, 33 percent of fund administrators lack the sophisticated levels of automation to cater fully to multi-asset products and therefore support transparent active management. Without sufficient automation, ETFs can also be complex to administer.
In the new world of the Fiduciary Rule, it will be even more critical to automate the accounting and administration of complex, non-traditional asset classes and structures – and deliver compliant, transparent and efficient valuations.
For asset managers, the resulting transparency will be vital to proving that funds are a winning choice for end investors. For fund administrators, this will be another chance to forge more proactive partnerships with their asset management customers – by investing in the solutions they truly need.
Challenges certainly lie ahead, as the DOL’s compliance deadline approaches. But by both upping its game through innovation and playing as a team, the buy side can keep its services fit for purpose.
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