As an adviser to advisers, Steven Miyao, president of financial research and consulting firm DST kasina, has a unique and informative platform from which to view the U.S. asset management industry.
As Miyao explains, DST kasina counts among its client base many of the big-name providers that dominate the retirement plan investment, recordkeeping and third-party administrator landscape. While there is obviously huge diversity in the characteristics and objectives of the many firms driving the U.S. retirement planning market, Miyao says he has seen several common developments recently in the way these businesses tick.
“Firms of all description are clearly focused right now on first understanding and then responding to the Department of Labor’s (DOL) new fiduciary regulations,” Miyao tells PLANADVISER. “Many have put on a strong face because they are confident their current business models will align well with the new fiduciary paradigm. Others are clearly far more worried, though they may not be showing it.”
Coming out of a string of recent meetings touching on the subject, Miyao feels it’s “pretty certain that the fiduciary rule will have three main impacts that are worth paying attention to.”
First is that flat-fee business is what the DOL is ultimately driving at with this rulemaking—because, as Miyao puts it, while the best-interest contract exemption the DOL published alongside the tougher rulemaking may help firms continue to rely on commissions in the short term, investors increasingly have bought into the idea that flat-fee business is simply superior from a conflict of interest perspective.
“In fact, clients had really started listening to this argument even before the fiduciary rule fight picked up in the last several years,” Miyao explains. “There are arguments to be made either way, of course, but that doesn’t really matter when clients are accepting the narrative that things like revenue sharing fees and commissions are inherently at conflict with plan participants’ interests. It’s all leading to new demand for flat-fee work.”
Participants’ biases are also behind the second main theme Miyao is tracking: There will be lasting pressure on providers to come up with lower-cost products that can help plan sponsors feel like they are protecting themselves from a fiduciary perspective. “Advisers and sponsors may understand that the lowest cost product isn’t always the best, but this is apparently not the opinion of a lot of participants and of the plaintiffs’ bar that has the 401(k) plan industry clearly in its sights.”
NEXT: Other themes, and their likely outcome
Contemplating the forces driving flat-fee business and lower-cost products leads one to the final theme DST kasina is finding in the U.S. asset management marketplace as a direct response to the DOL fiduciary rule: “We are just now seeing the real emergence robo-advice. We are still in the infancy of robo-advice, in fact. It will grow to be so much more in the future. I believe robo-advice will grow in ways we cannot predict.”
The tailwinds for robo are only partly related to the need for affordable and scalable advice that meets the requirements of the tougher fiduciary standard. Miyao actually cites the unwillingness of advisers to target Millennial clients as another main driving force behind the future of robo-advice.
“In our research we see that the average age of advisers’ clients is still trending up, at a pretty impressive pace,” Miyao says. “Simply put, the younger generations are not forming a connection with traditional financial advisers.”
Given the disconnect, one can envision how Millennials might take a fundamentally different approach to money management than their parents’ generation, Miyao continues. “It’s only a matter of time before an Apple, Amazon or Google decides to jump into financial services. They already have all the data on you they could need to formulate a financial plan. Certainly they have more data on you than the traditional target-date fund provider does.”
Miyao concludes by warning that, while we see many providers in the industry thinking a lot about all these themes, there is still a real challenge when it comes to getting firms to balance their short- and long-term strategic needs.
“It comes down to the slow pace of change in this industry,” he says “Firms know they have to make changes eventually, but the pressures never seem quite strong enough to force firms to make the more painful changes today. But inevitably the unwillingness to change catches up to you. Slow change can be very dramatic and powerful, in the end, and it can absolutely leave you behind.”