The concept that a financial advisor needs to be an expert in people management and financial planning and no in investments is gaining momentum within the financial services industry. Advisors are being encouraged to outsource their investment management services industry wide. In the post-DOL Fiduciary Rule world, this business practice will create significant challenges to financial advisors.
The advisor falls under the DOL’s definition of a fiduciary when they enter into a contract for compensation, partially or entirely, in return for recommending investment management services for accounts covered by the DOL Fiduciary Rule. As a fiduciary, the advisor is responsible for a prudent, disciplined process of investment management selection and ongoing monitoring. Simply selecting a best-performing money manager is not a prudent, disciplined process. Every client and their investment needs must be considered separately and uniquely – a step which goes beyond performance.
As a fiduciary, the advisor has to justify the advisory fee. They have to control costs brought on by the outsourced money management, while the rest of the fees and charges must also follow fiduciary tenants. If the advisor attempts to justify their advisory fees based on expertise, access, and/or value add, then they must be able to exhibit evidence proving their claim.