The future of financial advise and why banks are well positioned to be the leaders

In a recent American Banker article, “New Rules of Retirement Advice Get Mixed Reviews”, Lydell Bridgeford discusses the Department of Labor’s new regulation plans on how financial services firms that act as plan fiduciaries can provide investment advice to their plans participants.

The new regulations allow participants to receive investment advice through a computer model certified as unbiased. The idea is to create a regulatory environment where financial services firms could provide advice to plan participants in a way that doesn’t conflict with their own interests.

These new regulations were introduced back on January 21st but put on hold by the Obama administration to allow further review. The original launch date was set for March 23rd but it’s now set for May 23rd. Many suspect that senior Obama officials and Democratic senators are going to try and reverse some of the Bush-era regulations in the Pension Plan Act of 2006.

But according to Alan Vorchheimer, principal at Buck Consultants in New York, he’s not so sure these new regulations will help plan participants to have access to investment advice. He believes many fiduciary advisers will see the annual audits and compliance ensuring the advice being provide is unbiased as burdensome and won’t choose to provide such a computer system to participants.

How does this go in favor of banks? Simple, unlike plan providers, banks don’t care which product their customers eventually choose. There is no conflict of interest what so ever leaving the investment advice and education window wide open for banks to provide. And studies show that many consumers are more open to receiving messages from their bank then any other type of financial institution. According to a study conducted by the BAI and Mercatus LLC in 2007, “mass affluent consumers who are generally less confident about retirement, and who are worried they lack sufficient assets to retire, are the most receptive to bank messages”. And with recent scandals such as the highly publicized Madoff scheme, I can only imagine that the number of consumers more receptive to their banks messages has gone up.

The article ends with Cara Welch, director of public policy at WorldatWork, saying, “there is also a concern that you can overwhelm an employee with too much information, so you have to make sure that the education or advice that is provided is clear and makes sense to the employee”. Cara brings up what might be the single biggest challenge facing those looking to provide education and advice to customers. Having education is one thing, but having education that is easy to read and understand is a whole other ball of wax. If you don’t get this right, then all your efforts will most likely fall upon deaf ears.