With so much upheaval in the economy one wonders about what changes may arise in the not too distant future. In that context let me offer two predictions:
There could be no development more disruptive to today’s financial products distribution landscape than the leveling of the regulatory playing field and the categorizing of all advisors as fiduciaries. It’s coming. Inevitable, in my judgment. RIAs, brokers and insurance agents will all operate on a level playing field and the results will be spectacularly disruptive. Start planning now.
In the Post Madoff, post-Lehman, post-AIG world of financial services, the investing customer- especially the Boomer investing customer- will not tolerate anything less than a fiduciary standard of care. What Boomer customer (when he or she understands the difference, and they will) won’t prefer to have his/her financial interests placed first?
Different industries will look at and respond differently to the forces pushing us toward the adoption of a blanket fiduciary standard.” How will industries react? Look for a bifurcated response between the investment management and insurance industries.
Life Insurers
This is a true inflection point for insurers. Will they opt to embrace transparency and retool their distribution models? My guess is that many insurers will be late to react and then do whatever possible to delay (defeat) the adoption of the blanket fiduciary standard. There is also the issue of distraction. Those insurers seeking to invalidate SEC rule 151(a) through a legal challenge will continue to expend energy on this effort. But whether that are or are not successful may not matter much in the final analysis. The regulatory environment is shifting under the insurers and unless they grasp the magnitude of the coming disruption they will be caught flatfooted and unprepared.
Investment Managers
How will the investment management industry respond? In a recent InvestmentNews article the Investment Company Institute’s President & CEO, Paul Schott Stevens, was quoted as backing adoption of a blanket fiduciary standard. He stated that a fiduciary standard, “…does provide a higher standard of responsibility and accountability,” and he asked, “Isn’t that something that all of our recent experience suggests is important?” After Madoff and company, who could reasonably argue that the answer to that question should be answered “yes?” Not the Boomers, I’m betting.
After suffering $Trillions in investment losses the Boomers will demand a fiduciary standard of care from every advisor they engage with.
With Obama atop the Federal government we are likely to see a return to a Carter-like strengthening of Federal regulation, generally. In terms of financial services, following $8Trillion of accumulated bailouts/guarantees and back-stops, the forces for intense regulation cannot be stopped. This probably means, among other things, Federal takeover of insurance regulation (to prevent the next AIG).
Prediction Number Two: The traditional product-centric/asset allocation culture will be supplanted by a new “Framework Culture” that is better equipped to recognize and manage the full spectrum of a retiree’s risks.
In the framework culture investing (financial capital) doesn’t go away but it does change. The investing strategies employed in the framework culture will be far more outcome-focused and funded by complimentary products that are mixed strategically in order to optimize overall performance.
In the framework culture “performance” isn’t defined by investing alpha as much as it is by “psychological alpha,” the investor’s ability to persist with the overall retirement security strategy through even the bleakest periods of investment performance.
“Psychological alpha” can be delivered by time-segmentation of assets and the inclusion of a lifetime “income floor” that collectively provide predictable retirement income and appropriate exposure to upside investment opportunity in accordance with the investor’s preferences and risk tolerance. Importantly, “risk tolerance” in this context focuses on evaluation of retirement income risk tolerance.
Products will come and go over time, but the framework endures. Products will be tweaked with innovation in order to match performance with objectives. But the enduring framework provides an understandable, monitorable roadmap.
Other forms of capital such as Social Capital and Human Capital are critically important in the framework culture. In fact, one could argue that these types of capital have taken on more importance than at any time since the introduction of Social Security. Outsized losses in qualified and non-qualified investment accounts, low personal savings and few defined benefit plans are only some of the factors that accelerate the need for a re-definition of retirement income planning. Significantly, this is already taking place. At the Retirement Income Industry Association the next-generation advisory process is being developed, and it can’t arrive quickly enough. (See March 2009 Research Magazine article by RIIA Chairman, Francois Gadenne).
The movement toward blanket adoption of the fiduciary standard and the arrival of the framework culture are disruptive developments that will ultimately serve the best interests of investors. They are developments that will also serve the interest of companies that demonstrate their ability to successfully adapt to a new way of doing business.
Please let me know if you agree with these predictions.
©Copyright 2009 David A. Macchia. All rights reserved.
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