At Wholesaler Masterminds we are committed to bringing you additional information about DOL; how you and your advisors can cope with it and profit from it.
In order to do that, we have another recognized industry expert, Stig Nybo, with us.
Stig is a 25 year veteran within the retirement services industry. Stig has had the opportunity to help build several organizations within the retirement plans business, helping propel them into a leadership position. His leadership experience includes sales, marketing, and responsibility for the overall organization. Most recently, he served as President of US Retirement Strategy for Transamerica, where he led work on the DOL rule.
He is an award winning author for the book Transform Tomorrow – Awakening the Supersaver In Pursuit of Retirement Readiness; a 2012 book focused on changing saving behavior that received multiple awards, including two USA Best Book Awards in the categories of Social Change and Business – Investing.
He has a passion for sharing best practices to improve retirement outcomes and frequently writes industry articles and speaks at industry meetings. In 2013, he was named 5th most influential person in the retirement plan industry by 401k Wire.
Transform Tomorrow: Awakening the Super Saver In Pursuit of Retirement Readiness, is available from Amazon.com.
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Full Show Transcript:
Rob Shore: Stig Nybo, welcome to The New Wholesaler Masterminds Radio Show.
Stig Nybo: Thank you Rob.
Rob: It’s really great to have you here, let’s just kind of dive right in. The first thing we need to tackle right now is something that just occurred and that, of course, was our presidential election. And in our presidential election the president-elect, according to some quotes of experts, has suggested that the DOL fiduciary rule will be a thing of the past.
Stig, what’s your take on the election? What’s your take on the stickiness of the rule? Will it be changed or otherwise amended because we have a new administration coming into Washington?
Stig: Well I’m going to stick to talking about the rule, or the election and its effect on the rule, rather than my impression of the election itself, if that’s alright?
Rob: Sure, absolutely.
Stig: So I think it’s important to keep in mind the backdrop and what’s gone on in advance of the election itself. The rule, actually, as you all know went into effect this year, early this year and it will formally go into effect… I should say the regulation actually has to be adhered to on April 10 of 2017. So a lot has happened in getting us to this point and I don’t think it’s likely that the rule gets pulled or changed in any material way. In fact, I’ve been following that fairly closely, and really the smart money, if you will, is thinking that the rule will go along largely unchanged, although certainly, I’m sure there will be plenty of discussion around it.
And a couple of the reasons for that one is that again it went into effect well into the prior administration. So it can’t simply be repealed at the outset. And if you think about the timing of changing a Department of Labor, or I should say, the Secretary of Labor, that’s probably not gonna go into effect until sometime at the end of Q1 earliest, which effectively means that the rule itself would have to be going into effect about that same time. So I just think the likelihood of something changing and repealing the rule is quite small at this point.
Rob: And isn’t it true, correct me if I’m wrong, this was hatching, by way of commentary and input and guidance, this was hatching for years to get to this place, isn’t that right?
Stig: Absolutely, in fact I’ll give you a little bit of my own history. I was on the qualified plan side, so 401k side and we’ve always thought that the rule was about the 401k business, it really turns out that it’s about the about IRAs perhaps more than 401ks. And the first iteration of this rule was all the way back in 2010. So that was the first launching of it, if you will, it got pulled back in ‘11 and then re-proposed in ‘15. So it’s been going for a long, long time and it’s really premeditated how this went into effect and really they anticipated the fact that maybe the administration would change. In fact, they knew the administration would change, and they really planned this out quite well at the Department of Labor.
Rob: So let’s dive into some specifics and of course as always on the show we want to point our answers directly at wholesalers and their leaders and how they face off with their advisors, with their broker-dealers. What are some of the biggest challenges that you’re observing as you’re working with clients, talking with leaders, talking with broker-dealers? What are some of the biggest challenges that you’re observing today?
Stig: Well, I think the biggest challenge is the unknown, right? When you get something that is a thousand pages in length and quite technical and where the rule itself, it really has a lot of tentacles. So there may have been an intention with respect to something that was written but if you look at the unintended consequences of what was written and the rule that does change or how it changes the rule, it can have a pretty profound impact. And so I would say that there’s been a lot of talk about this idea of unintended consequences.
So there are a lot of things that the rule touches, that it maybe wasn’t intended to touch. And I think that, that unknown is going to be quite challenging. I’ve gotten the question about how a joint meeting for wholesalers could possibly be impacted, in other words, can I go out with an advisor and connect with one of their clients? And really that kind of gets back to whether or not they would be deemed to be giving advice and that whole area is a bit cloudy. So I think the biggest challenge that we’re all facing in the next year is, this kind of flushes out, is really knowing where we stand and what we can or cannot do. And there are a lot of opinions that are in direct contradiction to one another, and candidly we don’t know which one is right in many cases.
Rob: It’s interesting that I listen to you describe that…what goes through my mind is the market hates uncertainty, witness what happens on election night. And then wholesalers hate uncertainty and you’re talking about maybe another year after the implementation, or another year past the April deadline, for us to kind of figure it out, and that presents a challenge unto itself. You talked about unintended consequences and one of them perhaps the whole idea of a wholesaler being with the public customer, with the financial advisor. What other unintended consequences do you think are looming?
Stig: Well, I give you a direct one here. One of the things that the rule did was it changed the act of talking to somebody about a Rollover IRA. It changed that from a non-fiduciary act to a fiduciary act. You’re actually giving advice when you’re helping somebody to determine whether or not they should or should not roll over their IRA. Well, I think a pretty profound unintended consequence of the rule is that that will have an impact on how people approach somebody who’s either deciding whether they’re going to roll money out of plan into an IRA, or perhaps spend that money, to pocket that money, take the penalties and not roll it over.
Again I think that’s not what DOL intended or anybody else intended but clearly the fact that it’s difficult to talk to people about whether or not they should roll over will have an impact on leakage out of qualified retirement plans, which we all know is a real problem. So that’s a classic example of an unintended consequence. I think other examples would be that in certain cases certain products are very appropriate and fitting to a client but by virtue of how, perhaps, they are compensated, in other words, they may have non-level compensation and that presents a problem and an advisor may avoid them for that reason because they are concerned about having to support their decision. So I think those are both two good examples.
Rob: They are good examples and I thank you for them. You said leakage and I want to make sure that no one of our listenership is assuming anything about what you mean about leakage. And I know in your presentation you talk about it as well. What do we mean by that? What do you mean by leakage?
Stig: It’s a good question. I tend to speak in jargon occasionally, so thanks for catching that. Leakage is simply the extent to which money leak out of a qualified retirement plan system. So 401k plan, you have the ability upon terminations of employment, it’s called a distributable event, where you can pull money out of a plan and you can potentially go by the classic Winnebago, right? And instead of rolling that into an IRA and continuing to keep the money inside of the retirement system. And leakage is one of the bigger problems that we have with respect to getting people prepared for retirement.
They never gain traction, they never get enough money in their account because they continually let it leak out when they move from one job to another, and consequently they don’t get kind of over that hump and really start to save for retirement. So leakage is a problem and I don’t think this helps leakage in any way, in fact I think it hurts leakage.
Rob: When you’re assessing and observing distributors and product manufacturers that are handling this change in the most efficient and effective way, what do you see in terms of the spectrum? Our last set of experts talked to us a bit about the spectrum of preparedness, if you will. What were you seeing in the spectrum of preparedness and what sort, and I know you’ve listened to the other podcast, what sort of additional insights can you help us with around best practices or maybe even worst practices, around preparedness?
Stig: Well, so you caught on my theme of the environment being ambiguous for the next year. One of the things that you can control, and one of the things that you must control as a product provider, as a distributor of any kind, is truly understanding the rule and building to it if you will. So if you understand what your clients need, let’s say you’re a wholesale organization, and you’re wholesaling through advisors, you need to understand how your advisors are going to treat the rules. In other words, are they going to, as some firms have, go directly to a completely level compensation environment?
If they do that, you as a product manufacturer, as a distributor, you need to make sure that you understand that. If you understand that you can build to it and make sure that you’re prepared, and again I think it’s so important for firms to control the things that they can control. And you can control how prepared you are for this rule. And to answer your question directly with respect to how varied the response is to this rule, I would say on the extreme end there are some firms that have not cracked a book, so to speak and there are other firms that are on the last page.
And one of my comments about the election, going back to the election, is that some firms are so far along in building that they probably don’t want this thing to change. In other words, they’ve already kind of mapped out their future and a change would have a pretty dramatic impact on that, other firms would like nothing more because they’re quite unprepared for it. So I think it runs the gamut and, in fact, I’m sure it runs the gamut having seen different firms that are in various states of preparedness and again it’s one of those things that you can control. So I just think it’s critical that firms get after it and really put an iron-clad plan in place that helps them thrive in this environment and I think it’s possible to thrive. In fact I think…
Rob: Let me interject something here because I’m sort of dumbstruck, maybe I’m just looking at our world through rose colored glasses. You ran a distributor, how is it that a firm circa, November 2016, with DOL looming for April, not five months away, how is it a firm has not cracked a book, in your humble opinion, of course?
Stig: So it’s not an easy environment, right, if we’re being candid about where we’ve been even prior to the DOL rule, there’s been fairly significant dose of margin compression. We’ve all felt the battle of active versus passive management. So the backdrop is one where there have been a lot of things that are already complex leading up to it and so, candidly, a lot of firms have had their hands full. And in many respects firms have…I should say in some respects, some cases firms have felt like, well, that doesn’t really apply to us.
And that probably happens more on the manufacturer side, so if you’re wholesaling into an advisory firm then it does in the advisory firm itself. So a broker-dealer, let’s say, they’re acutely aware of the fact that this, has significant implications for their business and they’ve been working towards it. But their worlds are pretty complex as well, so I would say they probably have a bigger build. I think the, not cracking a book often happens on the true manufacturer side, where firms don’t think that it’s gonna have that dramatic of an impact on their business.
Rob: Stig you speak in front of both advisors and wholesalers, is that a true statement?
Stig: That’s correct.
Rob: Wholesalers you should know that Stig is available through Wholesalers Masterminds Speakers Bureau and if you’re looking to have a speaker come out and do a road show, a Complex group presentation, National Sales Conference, Divisional meetings etc. Stig, amongst the many luminaries at Wholesalers Masterminds Speakers Bureau, is available. Go to Wholesaler Masterminds go to wmmspeakers.com.
Stig when you’re out there speaking in front of advisors, let’s talk about that for a moment, when you’re out there speaking in front of advisors where are they getting stuck?
And the reason I’m asking particularly is, the closer we get the more knowledge that our community has, the more they’re honestly trying to help financial advisors. Now financial advisors, is it true, are slowly starting to creep into information overload, they’re getting a little deer in headlight look about them, how do we help? How do we assist?
Stig: Yeah, so it’s a great question because I…to me if you can’t go out and take an advisor to an expensive lunch or to a ballgame, if those things are becoming more and more difficult to do, the big question becomes what do you do, what do you focus on as a wholesaler? And I really think that the next decade of wholesaling will become a decade of practice management, of truly delivering value to your advisor. And so as I think about what I would do if I were a wholesaler I would go to the market with a message that says, get prepared and hit the gas.
It’s an entire industry of advisors and distributors pumping the brakes. Everybody’s slowing down and I think there’s tremendous amount of ground to be had right now, to be gained, if you simply prepare and hit the gas. So if I were a wholesaler, I would be very intent on understanding the rule, and the basics of the rule. I’m not talking about all 1,000 pages and every nuance, but the fundamentals of the rule itself.
I would be out there encouraging my advisors to build their value proposition and to be very clear about what kind of value and what kind of compensation they’re getting from their value proposition. In other words what are they giving, what are they getting for it, and then I would be aggressive about taking that to market.
So I think it’s a decade that’s gonna be characterized by advisors getting very clear about the value they drive, making sure they drive that value. You’re charging a fair price for it and those that are most aggressive about getting to that new place are gonna win. And I think, it’s not unlike ERISA back in 1974 where everybody thought the world was coming to an end from a regulatory standpoint. The reality is entire industries crept out of it, and we’ve been doing this for what, four decades afterwards. So that would be my message if I were out there wholesaling.
Rob: One thing that hit me is you said that, maybe I’m a little slow, is one of the natural attributes of the great wholesaler is knowing how to present an effective message. For our advisors that are better at advisory and less proficiency at presentations and marketing, it would feel to me like a wholesaler has a very valuable gift to give to an advisor which as you said, “To craft their value proposition,” which of course we at Wholesaler Masterminds wholeheartedly agree with. But also how to communicate that value preposition, because now for the advisor doesn’t it become also critical, mission critical, that they’re able to tie the value of their advice to the fee that they charge because it’s all transparent on the retirement plan side one.
Stig: 100% agree with what you just said, I mean I just couldn’t agree more.
Rob: Wholesalers you should be thinking about that, you should be thinking about working with your financial advisors not only on the content of what the granularity is of their value proposition, how they present their firm, but also working with them on a very personal basis, with how do you communicate this. As I’ve seen over my years, so many guys are stuck in extracting great returns for portfolios with very little consideration, to how do I describe the fee angle of my business.
Stig let’s move on to another area. What do you think is gonna be selling in the new world? We’ve seen this whole migration…not migration; we’ve seen the evolution of firms starting to put their various flags in the ground. Merrill says, “Fee only business,” Morgan says, “Nope, we’ll take commission business.” Raymond James says, “We’ll take commission business,” Commonwealth says, “Fee only business.” I mean it’s all over the board. What do you see evolving?
Stig: So I’ve thought a lot about this and I see advice floating to the surface, and that’s a silly answer maybe but advice in and of itself is going to have value, whereas in the past we’ve oftentimes given that away and then we’ve charged for products. And so I think that’s as a simple answer, I think advice is gonna be the name of the game going forward and really solidifying that advice and making sure that it’s appropriate advice and that it has substance to it. So it’s a decade of value and we’ve got to figure out what that value is and to your point earlier we have to figure out how to communicate that to our clients.
And one of the things that I, again I’ve been in this business for 25 years and maybe at the lowest common denominator of this business which is the for 401k participant, and I’ve got to tell you people needed advice, they need it badly. So my concern about the DOL rule when it came out was, is it going to be a rule that takes advice away from participants or investors and makes it more difficult for them to get that. We saw that happen in the UK with the rules that they’ve passed recently, that advice has kind of floated up market, and that’s a bad thing. My answer is people need advice and find a way to provide that, find a way to charge a fair price for it.
That’s what’s going to thrive from selling in the new world. Products that don’t have value, you could argue they shouldn’t have ever been included in a portfolio. But I think that will come float to the surface now that the products that are included, they have to deliver value and you can do that through diversification, non-correlated asset classes, you can do that through active management. We’ve seen a long-term bull market now and of course, that favors indexing. The reality is that will turn at some point and downside protection will become more important again. So I think it’s more about advice, it’s more about delivering that in a way that’s valuable and then being very transparent about what you charge for it.
Rob: Wholesalers as you’re listening to Stig, as you perhaps I hope, listen to our first episode with the two other consultants and experts that we had, I hope you’re formulating discussion topics that you want to have with your advisors because even though, as we said in our last podcast about DOL, there may be some broker-dealers that frown on you going in and talking about the legalese of DOL, you should be no less armed and equipped to have thoughtful conversations about how advisers can handle their practice in this pre and pretty soon post DOL environment. Stig, thank you so much for being with us today.
Stig: My pleasure.