Positioning Asset Managers to Capitalize on the Opportunities Created by the DOL Fiduciary Rule

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Positioning Asset Managers to

Capitalize on the Opportunities

Created by the DOL Fiduciary Rule

A DST kasina Whitepaper

February 2016

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In February 2015, President Obama

directed the U.S. Department of Labor

(DOL) to update the requirements for

advisors of retirement plans to abide by

a fiduciary standard and put their clients'

best interests before their own profits. The

DOL delivered the final Rule to the Office

of Management and Budget for review

at the end of January and is anticipated

to release it publicly as early as March.

If the DOL Rule moves forward, it will

likely be effective before the end of 2016,

assuming that any challenges expected to

be mounted by Congress are rebuffed.

If implemented, the DOL Fiduciary Rule will likely also fast-track trends that are already afoot in financial services, including the use of automated digital advice, the move from higher-cost actively managed products to lower-cost passive investment products and the shift from commission-based to fee-based accounts. Leading asset managers have already been working on initiatives to address these changes by treating them as opportunities.

This whitepaper is DST kasina’s initial take on select aspects of the proposed DOL Fiduciary Rule and its impact on asset management firms. We highlight the implications of selected aspects of the rule to help business executives think about, and plan for, any changes to their distribution and marketing strategies that may be required. To that end, we have included a list of questions at the end of this report that asset managers can ask themselves to prepare for the new regulatory environment. The paper is not intended to provide legal advice or a comprehensive review of the proposed Rule.

Key DOL Rule Changes That

Affect Asset Managers

Two key Rule changes will affect how asset managers do business:

1. Regulatory authority over financial advice to retirement account holders is expanded 2. Compensation models that conflict with the

client’s best interest are prohibited

EXECUTIVE SUMMARY

CONTENTS

Key DOL Rule Changes that Affect Asset Managers ...4 Opportunities for Asset Managers ...6 What Leading Firms are Doing ...12 Key Questions Asset Managers Should Address...12

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Opportunities for Asset

Managers

Most asset managers will likely have to make adjustments to their current business strategies to comply with the new Rule. But beyond preparing themselves for the new requirements, leading firms already have been adapting or developing new business models, collaborating with technology vendors and making strategic acquisitions in response to the broader trends in financial services outlined above. They are aggressively positioning themselves to capture market share by:

ƒ Adapting to new disclosure requirements

ƒ Preparing to maintain and report additional data to DOL

ƒ Helping Individual Retirement Account holders receive needed advice

ƒ Rethinking call center support

ƒ Providing retirement education content

ƒ Anticipating demand for lower-cost product options

ƒ Ensuring continued servicing of small business plans

ƒ Identifying options for small, potentially orphaned, retirement accounts

What Leading Firms Are Doing

Regardless of what the final DOL Rule looks like, the asset managers actively addressing the opportunities presented by the shifts in financial services are clearly best positioned to succeed. The firms that are preparing themselves to thrive are:

ƒ Working closely with key distribution partners to deliver competitive products and services

ƒ Integrating digital portfolio-building and advice options

ƒ Obtaining deeper insight into advisors and investors

ƒ Overhauling and extending product offerings that anticipate demand for efficient management

ƒ Developing communications initiatives to build interest and trust with investors in addition to advisors

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In February 2015, President Obama directed the U.S. Department of Labor (DOL) to update requirements for advisors of retirement plans to abide by a fiduciary standard and put their clients' best interests before their own profits. In response, the DOL proposed the “Fiduciary” or “Conflict of Interest” Rule in April, setting off a fierce lobbying battle.

Proponents argue that the measure, which would require brokers to put their clients' interests ahead of their own in 401(k) and individual retirement accounts, is needed to protect workers and retirees from high-fee products that erode their savings.

Opponents maintain that the Rule would increase liability risk and regulatory costs for brokers, forcing retirement savers with modest accounts out of the market because of the increased expense of obtaining financial advice.

Despite public hearings, thousands of comments and a threatened rider to an omnibus appropriations bill that could have delayed or even prevented promulgation of the regulation, it seems that if the final Rule is published by April 2016, it could go into effect by year end. Despite the short-term disruption, the reforms should be positive for the standards and professionalism of the advisory business in the long haul.

If implemented substantially as proposed, the DOL Rule will also accelerate existing trends in financial services, including the use of robo-advisors, the move from higher-cost actively managed products to lower-cost passive investment products, and the shift from commission-based to fee-based accounts. Leading asset managers have been working on initiatives to address these opportunities.

BACKGROUND

KEY DOL RULE CHANGES

THAT AFFECT ASSET

MANAGERS

Research conducted by DST with third-party

administrators (TPAs), record-keepers, asset managers and registered investment advisors finds that leading firms are already shaping their strategies for product management, distribution and marketing to address the needs of fiduciaries providing fee-based advice.

Regulatory Authority over

Financial Advice to Retirement

Account Holders is Expanded

Under the DOL's proposed definition, any individual who receives compensation for providing advice that is tailored or specifically directed to a particular plan sponsor, plan participant, beneficiary or IRA owner in making a retirement investment decision will likely be a fiduciary. The fiduciary can be a broker, registered investment advisor, insurance agent or other client-facing professional. The suitability standard under which brokers currently operate would be superseded by the fiduciary standard.

Retirement investment decisions can include, but are not limited to, which assets to purchase or sell, and whether to rollover from an employer-based plan to an IRA.

Under the proposed Rule, the advisor, as a fiduciary, would be required to provide impartial advice in the client's best interest and to not accept any payments creating conflicts of interest unless they qualify for a new, principles-based exemption called the Best Interest Contract Exemption (BICE), discussed below, which is intended to ensure that the investor is adequately protected.

Rollovers are included. Rollovers from employer-sponsored retirement plans have fueled the growth of IRAs. According to the Investment Company Institute (ICI), 87% of new traditional IRAs in 2012 were opened only with rollovers.

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Professional financial advisors were the most common source of information for investors researching the decision to roll over money from their former employer’s retirement plan into a traditional IRA. 61% of traditional IRA-owning households consulted a financial professional for advice. The proposed regulations will likely govern any recommendation to roll money out of a qualified plan, and the investment advice provided once a rollover is completed. The rules should apply to plan advisors who work with individual participants, and to independent advisors — unaffiliated with the plan or sponsor — who are advising clients on their retirement rollovers.

Many large 401(k) plans have improved dramatically in product options and costs in recent years. It may behoove certain account holders to remain in large 401(k) plans if costs are a factor, as IRA expenses can run 25 to 30 basis points higher than 401(k)s, according to the U.S. Government Accountability Office, at least for large plans.

Compensation Models That

Conflict with the Client’s Best

Interest Are Prohibited

Under ERISA and the Internal Revenue Code, individuals providing fiduciary investment advice to plan sponsors, plan participants and IRA owners generally cannot receive payments that create conflicts of interest without a prohibited transaction exemption (PTE). The proposed Rule creates a new principles-based PTE called the Best Interest Contract Exemption (BICE). Unlike existing PTEs, which cover narrower categories of specific

transactions under more prescriptive and less flexible conditions, the BICE appears to allow firms to set their own compensation practices, as long as they commit to putting their client's best interest first and disclose any conflicts that may prevent them from doing so. Common forms of compensation in use today, such as commissions and revenue sharing, will be permitted under this exemption, whether paid by the client or a third party such as a mutual fund. To qualify for

the BICE, the advisor may be required to enter into a legally enforceable contract with the plan sponsor or retirement account holder that:

ƒ Commits the firm and advisor to providing prudent advice that is solely in the client's best interest

ƒ Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest and compensation structures that would encourage individual advisors to make recommendations that are not in clients' best interests

ƒ Clearly and prominently discloses any conflicts of interest, like hidden fees or backdoor

payments, which might prevent the advisor from providing advice in the client's best interest.

In addition to the new BICE, the DOL proposes several other exemptions, including:

ƒ A PTE for principal transactions that would allow advisors to recommend certain fixed-income securities and sell them to the investor directly from the advisor's own inventory, as long as the advisor adheres to the exemption's consumer-protective conditions

ƒ A new low-fee exemption allowing firms to accept payments that would otherwise be deemed conflicted when recommending the lowest-fee products in a given product class, with even fewer requirements than the best-interest contract exemption.

The proposed Rule also references the statutory exemption created as part of the Pension Protection Act of 2006, which generally allows fiduciaries giving investment advice to pension plan participants, beneficiaries and IRA owners to receive compensation from investment vehicles that they recommend in some circumstances: for example, the recommended investment vehicles result from the application of an unbiased and independently certified computer program, or the fiduciary's fees are level (i.e., compensation cannot vary based on particular investment recommendations). This specific exemption is currently not widely relied on because it is viewed as cumbersome and expensive. But it may have implications for the future of small, balanced accounts that broker-dealers could migrate to automated advice providers.

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Most asset managers will have to make adjustments to their current business strategies to comply with requirements of the new Rule. In interviews, many executives appear to be taking a wait-and-see

approach to addressing any challenges and managing associated costs. But leading firms already have been adapting or developing new business models, collaborating with technology vendors and making strategic acquisitions in response to the broader trends in financial services outlined above. They are aggressively positioning themselves to capture market share.

Adapting to New Disclosure

Requirements

Among the requirements of the BIC Exemption, certain compensation disclosures must be made to the public via websites and to retirement account holders at the point of sale.

A public website must provide information about, among other things:

ƒ Direct and indirect material compensation provided in connection with each asset that is available and has been purchased, held or sold within the last 365 days. This includes trailing and 12b-1 fees

ƒ The source of the compensation

ƒ How the compensation varies within and among assets

The DOL provided model disclosure charts for online and point-of-sale use that detail transactional and ongoing charges to investors, fees paid to advisors and their firms, and the cost of investing over periods of time.

The proposed Rule appears to require that annual disclosure be provided to clients within 45 days after the end of the applicable year and include three items for the applicable period, for each asset purchased, held or sold:

ƒ The price at which it was purchased or sold

History shows that regulators and technology vendors have specialized in solutions for specific rules. FINRA, for instance, has a modernized big data platform that examines and monitors over 4,000 securities firms and 600,000 brokers. Existing technology suppliers like Pinpoint Global provide SEC17a-4 compliance solutions focusing on activities such as Sales Material Submission & Review, Advisor Account Review, Gifts & Entertainment, Branch Office Exams, etc. Once the new Rule is finalized and fully understood, we expect FINRA as well as technology firms like Broadridge and DST Systems to develop and refine industry solutions.

The requirement for additional disclosure also provides an opportunity for asset managers to offer education on what fees and compensation pay for. We have seen thoughtful and creative approaches, including interactive tools, video tutorials and client-ready materials from Canadian asset managers in anticipation of CRM2. They provide good models for U.S. asset managers.

ƒ Fees and expenses paid by investor, directly or indirectly

ƒ The amount of compensation received by the advisor and financial institution, directly or indirectly

Technology solutions will make additional disclosure requirements less challenging to implement by calculating the costs and fees and automating the disclosure process. 62.3% of DST survey

respondents already plan to provide tools to advisors for investment policy statement development, fund monitoring, plan benchmarking and fee comparison.

OPPORTUNITIES FOR ASSET MANAGERS

62.3% of respondents

already

plan to provide tools to advisors

for fund monitoring, plan

benchmarking and fee comparison

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Preparing to Maintain and

Report Additional Data To DOL

In addition to the public and client disclosures, another condition of the proposed BIC Exemption would apparently require financial institutions to maintain certain transaction and investment return data for six years and make the data available to the DOL upon request.

For each transaction (purchase, holding and sale), the following information must be maintained by financial institutions:

ƒ Aggregate number and identity of shares/units involved

ƒ Aggregate dollar amount involved and cost to the Retirement Investors

ƒ Revenue received by the financial institution and any affiliate

ƒ Identity of each revenue source and the reason the compensation was paid

For each retirement account holder, the following information must be maintained at the investor level:

ƒ The identity of the Advisor

ƒ The beginning-of-the-quarter value of the portfolio (including plan and IRA assets)

ƒ The end-of-the-quarter value of the portfolio (including plan and IRA assets)

ƒ Each external cash flow to or from the portfolio during the quarter, and the date on which it occurred

Technology solutions already help asset managers to meet data retention requirements from the SEC and FINRA. In the case of mutual fund transaction data points, such as number and dollar amount of shares, compensation to intermediaries and financial institutions are retained by transfer agents. But firms should ensure that the available data fulfills the Rule’s requirements. Examples abound where assumptions have turned out to be incorrect. For example, with Rule changes related to Cost Basis Reporting, the existing data was assumed to be correct, but turned out to be insufficient and required many months of additional analysis and modifications to databases

and computer programs. So, prudent asset managers will collaborate with their transfer agents to ensure that the right level of data is available for reporting. Participant-level data is stored in plan administration systems (for example, ADP, Fidelity, Empower and Principal Financial). At first glance, the data required by the DOL is available in all platforms and already included in existing reports. But prudence dictates ensuring that existing data matches the DOL’s reporting requirements.

Helping Individual Retirement

Account Holders Receive

Needed Advice

According to the 2015 Investment Company Fact Book, 1 in 3 U.S. households invest in at least one IRA. Total IRA assets topped $7.4 trillion in the fourth quarter of 2014. That represents more than one-quarter of the total $24.7 trillion retirement market in the United States. The largest component of IRA assets is invested in mutual funds, followed by other assets, including ETFs, individual stocks and bonds, and other securities held through brokerage accounts ($3.0 trillion at year-end 2014). The mutual fund industry’s share of the IRA market was 48% at year-end 2014, the same as at year-end 2013.

The ICI reports that, although most U.S. households are eligible to make contributions to IRAs, few do. Indeed, only 12% of U.S. households contributed to any type of IRA in tax year 2013. In addition, very few eligible households made “catch-up” contributions to traditional or Roth IRAs.

Rollovers have fueled the growth of IRAs. Traditional IRA-owning households generally researched the decision to roll over money from their former employer’s retirement plan into a traditional IRA. The most common source of information was professional financial advisors. Advisors were consulted by 61% of traditional IRA-owning households with rollovers, with half indicating they primarily relied on financial professionals.

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Asset managers need to adopt a more comprehensive advising role and provide financial advisors with educational resources to help them identify the best options and justify any choices that may be more costly but provide a better outcome. ICI survey data shows that the top reasons investors want to roll over include preservation of tax deferral, seeking more investment options and a desire not to leave assets with a former employer. Consolidation of assets and a desire to use a different financial services provider are also frequently cited reasons. Asset managers can provide collateral and tools to help advisors justify fees for a service that goes beyond advising on investments and portfolio allocation to address broader retirement planning concerns, like retirement income and draw-down projections, informed

recommendations about claiming Social Security, Medicare enrollment and assessment of long-term care needs.

Rethinking Call Center Support

The impact on call centers is dependent upon how an asset manager uses the call center staff today. For example, if a retirement account holder contacts a call center with questions about specific fund options while exploring whether to exchange, roll over, open or contribute to an IRA, the proposed Rule could potentially vault him into a contract under BICE, if he is sitting in load funds. The same could be true for an existing IRA account holder who is performing one of these actions with his fund company or intermediary providers for the first time after the Rule goes into effect.

However, the impact is clear for call centers using personnel as commissioned IRA sales people: they will likely need to be retrained to provide general advice and to steer calls regarding particular investment options to fiduciaries. Training programs and intelligent scripting technology could aid IRA help desk representatives to conform to firm compliance standards. Firms will need to work with their

compliance departments to determine the appropriate approach.

It gets more complicated when call center personnel receive additional compensation for referrals of participants to providers or specific investment products. As it stands, any referral fee would almost

certainly be considered compensation and create a fiduciary relationship for non-commissioned salespeople. The DOL may exempt referral fees to those providing purely educational services in the final Rule, but, to avoid fiduciary status, firms will likely need to eliminate compensation for referrals to providers.

However, DOL Advisory Opinion 2005-23A warns that fiduciary advisors who provide advice about rollover assets to a plan may be subject to ERISA’s prohibited transaction rules. By exercising de facto discretion over plan assets, the DOL reasons that the fiduciary may be using plan assets in its own interest by collecting an advisory fee. In addition, a 2013 U.S. GAO report found call center representatives encouraged IRA rollovers without making a reasonable due diligence inquiry as to whether participants would benefit more by staying in the plan. Given the heightened interest of the SEC and FINRA in marketplace abuses surrounding rollovers, asset managers that want to continue providing rollover assistance must prepare to meet the requirements of fiduciary status.

Providing Retirement Education

Content

Advisors and plan sponsors need to be able to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties. For nearly 20 years, the “education carve out” (as reflected in Interpretive Bulletin 96-1) and the 2010 DOL proposal allowed firms to provide “information and materials that constitute ‘investment education’ or ‘retirement education’” without being considered a fiduciary, regardless of who provides the educational information and materials or the form in which the information and materials are provided. However, the proposed Rule appears to narrow the definition of ‘education’ to prohibit materials that include “any specific investment recommendations that the retirement saver can reasonably be

expected to act upon.” In a similar vein, the proposed Rule likely limits the seller's carve-out to sales presentations to large plan fiduciaries (plans with at least 100 participants and $100 million in AUM), who purportedly have the financial expertise to differentiate investment education and advice from sales pitches in the context of investment products.

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As a result, educational guidance on the extent to which an individual should invest in different asset classes based on basic factors — for example, age or current retirement savings — could trigger fiduciary status if it attempts to help investors by connecting the dots between asset categories (e.g., large-cap equity, corporate bond) and specific examples of investments that fit within those categories. In other words, firms will likely need to revise any content that connects the dots between abstract categories and actual investments in their educational materials. Website tools that prompt investors to enter

information about themselves and their investment goals and provide hypothetical illustrations that are specific and tailored to those goals could trigger fiduciary status, too — especially if the results are accompanied by an “Act Now” button to implement the recommendation.

Driven by plan sponsors, the demand for retirement and financial education services that can be passed on to employees has never been higher. Leading firms are developing or enhancing digital tools to help wholesalers provide guidance with portfolio modeling and allow users to compare and contrast portfolios and prices. They will initiate training programs with their sales teams to clarify any

necessary changes to advisor education. Some asset managers also indicate that their reliance on advisors to communicate about their products needs to be augmented with direct communication to investors in the form of digital marketing and advertising. Independent education providers like Wealth Management Systems Inc., which are unaffiliated with asset managers, may also be used to deliver content and tools.

Anticipating Demand for

Lower-Cost Product Options

Many asset managers already have expanded share class offerings of mutual funds that comply with proposed DOL regulations to meet the demands of plan sponsors for lower-cost options. They have also added low-cost, passively-managed options, including ETFs, to their product lineups. Plan sponsors and their recordkeeping partners (as well as payroll providers like ADP) will likely need to demonstrate to their plan

participants that they negotiated with asset managers to include cheaper share classes optimized for retirement plans, including “I” or “R” share classes. They will be pushing harder for R5 (no 12b-1 fees) and R6 share classes (no 12b-1 fees and sub T/A fees). And they will turn to asset managers that can provide them with products meeting their requirements for performance at lower cost.

Ensuring Continued Servicing of

Small Business Plans

Of the $15 trillion invested in retirement savings, $472 billion is invested in plans provided by small business owners for more than nine million U.S. households. Many small businesses may not be able to offer a 401(k) plan because of cost, administrative complexity or eligibility rules. So, they rely on

simplified retirement plans to cover their owners and employees, including SEP and SIMPLE IRA plans. It is argued that it will become cost-prohibitive to service smaller accounts that historically have compensated advisors with commissions. Any new compliance costs and legal liabilities on advisors to SEP and SIMPLE IRAs would be passed on to business owners and their employees. However, 57% of client assets are managed in fee-based accounts today, and a number of advisors to IRAs and small 401(k) plans are already compensated on a flat-fee basis in a manner consistent with the proposed DOL requirements. 62.9% of respondents to a DST survey believe that small plans and accounts will largely be served by fiduciaries.

62.9% of respondents

believe that small plans and

accounts largely will be

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To comply with the proposed new Rule, commission-based advisors and their financial institutions will likely have to adjust how their products and services are structured, and how the retirement plans and IRA accounts are charged fees. For financial advisors working for asset managers or insurers offering investment products, steps will likely need to be taken to eliminate conflict of interest in recommending their own products.

1. Asset managers should provide customers with fully transparent and detailed information on products in which commissions are paid (e.g. annuities).

2. Firms should be able to demonstrate that their products are optimally priced within the competitive market and that clients are not driven to more expensive funds.

3. Multi-asset portfolios will be scrutinized for the typically high fees incurred by the inclusion of proprietary, actively-managed funds, especially when they are the QDIA. They will come under pressure to include passive investment options when there is no justification for higher-priced actively-managed asset categories.

The funds included in SEP and SIMPLE IRA plans are generally determined by plan design vendors and typically include a range of investment options. The responsibility of the employer and its advisor is to ensure that the selected vendor offers a suitable product at a commercially reasonable price.

Identifying Options For Small,

Potentially Orphaned,

Retirement Accounts

Evidence from outside the U.S. — specifically from the United Kingdom, Australia and Canada, which have implemented Rules discouraging or prohibiting sales commissions — suggests that U.S. investors with modest retirement accounts (less than $25,000) face the very real potential for a growing advice gap. Advisors may determine that servicing smaller accounts poses too much risk for litigation and too little profitability under the new Rule.

There has been no shortage of estimates on the number of accounts and assets that fall into this category. DST data shows approximately 35 million IRA accounts on its systems with less than $25,000 in assets potentially at risk. DST survey research finds that 25.4% of participants respond that, to receive personal advice, advisors will require a minimum balance of $50,000. 34.3% say a $100,000 minimum balance will be required.

Morningstar estimates between $250 billion and $600 million will be shifted from personal service to automated advice platforms. In news reports, LPL warns it may have to “orphan” retirement accounts with less than $15,000, which accounts for approximately 3% of retirement assets on LPL’s brokerage platforms. Of course, a portion of these IRAs are held by high-income households that also invest in 401k plans. They likely already benefit from professional financial advice. Low-income households that receive advice reportedly use banks and brokerages in equal number.

The trend to use wrap- and fee-based accounts is likely to accelerate, as is the use of low-cost, passive investment products. Strategic Insights reported that 70% of all mutual fund shares sold in 2014 were in wrap/fee based products, up from 34% in 2007. Reuters reports that up to $1 trillion in assets will move from active to low-cost passive investment products once the Rule is implemented — mainly because the regulators seem to view low-cost passive investing as more consumer friendly than active approaches.

of respondents

believe advisors

will require a

$100,000 minimum

balance

of respondents

believe advisors

will require a

minimum balance

of

at least $50,000

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The new Rule may contribute to increasing popularity of several new business models.

ƒ Automated Investment Platforms: Also referred to as “robo-advisors,” they provide low-cost automated investment management services to investors. The ability to achieve scale and profitability will determine the future of automated advice providers, which haven’t been around long enough to be tested in down markets or among a broad variety of investors. Asset managers will either adopt or acquire these platforms, taking the lion’s share of automated advice assets. An obvious target for robo-advisors is accounts with balances below $25,000 projected to be orphaned because they are not big enough to meet the minimum balances of fee-only advisory firms.

ƒ Portfolio Outsourcing: Focus on holistic financial planning while outsourcing the investment management function to managed accounts or solutions-based multi-asset products provided by the home office or third-party asset and wealth managers. Scale and asset accumulation are critical to the health of this business model.

ƒ Proprietary Investment Management: Manage client assets in house utilizing proprietary optimized portfolio models. The models use both active and passive strategies. However, there will be a concentrated use of active strategies as passive products and ETFs making up a greater portion of the portfolio. Scale and asset accumulation are still important, but the continuous attraction of new clients is less critical, as these firms and advisors attract a high net worth clientele.

ƒ Total Scaled Advice Platform: Provide a range of automated to full-service financial planning and investment management, utilizing a combination of human and digital advice to provide services based on assets under management. Leading firms using this business model will be the incumbent broker-dealers who are most adept at integrating digital services into their existing wealth management practice and scale their services for various levels of investor assets.

Digital platforms are in a strong position to fill the advice gap and will likely be one of the primary beneficiaries in the wake of more stringent fiduciary rules. The technological advances in the advice space are increasingly sophisticated, efficient, customizable and popular. They broaden access to quality, tailored investment advice and investment choices at an affordable price, thereby directly addressing the primary opposition to the proposed ERISA rule. They also provide asset managers integrating these services with a new opportunity to reacquaint themselves with shareholders and their needs. Large asset managers with significant footprints across the wealth management industry like Vanguard, Fidelity, BlackRock and Invesco already have built, acquired or partnered with automated advice providers. Digital advisors like Betterment and Financial Engines are actively pursuing the retirement 401(k) plan market. Digital advice will likely become an inevitable outcome for small retirement investors. That has implications for the types of investments that will be included.

Asset managers whose businesses aren’t suited to servicing digital advice platforms need to find ways to adapt their products to be candidates for inclusion on these platforms. While most of these platforms are currently ETF-centric, as digital platforms grow they are likely to support multiple types of vehicles. A consistent element for digital platforms and the other business models discussed above will be an emphasis on fees. Thus, low-cost no-load mutual fund share class options and ETFs will be critical to the retention and growth of product assets for the aspiring and leading asset managers. Asset managers that adapt and manage their product lines to most effectively address the product demands of the various business models will emerge as leaders under the new Rule.

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WHAT LEADING FIRMS

ARE DOING

Asset managers that are actively addressing opportunities created by the growing trends in financial services are best positioned to succeed, regardless of what the final DOL Rule looks like. The demand among investors for transparency, lower fees for advice and lower-cost products is undeniable and undiminished. Firms positioning themselves to thrive in the future are:

ƒ Working closely with key distribution partners to deliver competitive products and services

ƒ Integrating digital portfolio-building and advice options to deepen connections with distribution partners

ƒ Obtaining deeper insight into advisors and investors to build stronger, long-lasting relationships

ƒ Overhauling and extending product offerings to meet new market demands

ƒ Developing communications initiatives to build interest and trust with investors, in addition to advisors

KEY QUESTIONS ASSET

MANAGERS SHOULD

ADDRESS

The proposed DOL Rule provides progressive asset management firms greater impetus to find opportunities for differentiation and growth by addressing increased demand for passive investment products, fee-based guidance and automated advice. Key questions should help business leaders think about the best options for their firms.

Organizational

ƒ Do you have a team in place to manage new DOL requirements in business planning for 2016 and beyond?

ƒ Are you organizing and mobilizing your teams to monitor and respond to the proposed DOL Rule and its implications (e.g. Home Office support, work management/forecasting, digital/ technology, business intelligence and reporting)?

ƒ Are your technology and communication systems prepared to implement requirements of the proposed Rule?

Sales

ƒ Have you met with key distribution partners to learn about possible changes to relationship requirements?

ƒ Are you reviewing current compensation policies, agreements and practices with distributors and advisors for changes that may need to be made?

ƒ Are you developing and implementing training for your sales teams to understand requirements of the proposed Rule?

ƒ Are your broker-dealers and financial intermediaries asking for support in serving small accounts?

ƒ Are your broker-dealers and intermediaries changing their policies on what funds of yours they are selling?

Marketing

ƒ Are you reviewing traditional and digital communications and collateral for any

adjustments needed to comply with the proposed Rule?

ƒ Are you examining what changes need to be made to retirement education content and tools?

ƒ Are you analyzing interactive tools that recommend asset allocations and products to review what changes may need to be made to be in compliance?

ƒ Have you identified technology vendors that can help with retirement education and communications solutions?

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Operations

ƒ Do you anticipate broker-dealers and

intermediaries to move between share classes and/or significant conversions between share classes? If so, how are you preparing for it?

ƒ Do you expect an increase in the non-advised (orphan) accounts found on your system?

ƒ Are your partners (e.g., retirement platforms, transfer agents) able to provide the DOL with required reports?

ƒ Are you reviewing potential impacts on scripting and training for call center personnel?

ƒ Have you identified technology options for automated rollover solutions?

ƒ Have you considered technology solutions that can assist with data retention and reporting requirements?

Product Strategy

ƒ Are your product capabilities aligned with intermediary business models once the new Rule is implemented?

ƒ What share classes are your broker-dealers and intermediaries considering in order to help retain and grow their business?

ƒ How can your product and investment

management expertise assist in the participation and growth of digital advisor platforms?

ƒ Do you periodically evaluate the cost of your products on DCIO platforms, and can you demonstrate that you’ve acted in good faith in pricing your funds for IRA and DC retail customers?

ƒ Are you regularly evaluating the risk-return benefits of actively-managed strategies in your multi-asset class (MAC) funds?

ƒ Are you reviewing disclosure implications for target-date funds?

ƒ If you are a variable annuity provider, what changes are you anticipating to simplify products like investment-only annuities?

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NOTHING CONTAINED HEREIN IS LEGAL, TAX, ACCOUNTING, INVESTMENT, FINANCIAL OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE USED AS SUCH, EVEN IF ANY INFORMATION HEREIN APPEARS TO PROVIDE SUCH ADVICE OR TO INTERPRET LAW.

This information is intended to provide a general overview of certain market developments and is not an offering or commitment to provide any services. kasina, LLC, is a wholly-owned subsidiary of DST Systems, Inc. This information is for use by institutional clients only is not intended to be relied upon by retail clients. This information, which may be considered advertising, is for general information and reference purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter, and is not to be used as such. Neither kasina, LLC nor DST Systems, Inc. warrants or guarantees the accuracy or completeness of, nor undertake to update or amend the information or data contained herein. We expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon any of this information or data. Trademarks and logos belong to their respective owners.

© kasina, LLC 2016

For more information about DST kasina’s research or any of our other services, please contact us.

DST kasina, 24 West 25th Street, 11th Floor, New York, NY 10010 | info@kasina.com|www.kasina.com|

212.349.7412

Principal Author:

Contributors:

Julia Binder

Head of Strategic Marketing Research and Managing Editor of e-Business Compass

Matthew Fronczke

Engagement Manager

Rubesh Jacobs

Director

Tracy Needham

Senior Research Analyst

Lawrence Petrone

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