Investment Industry Roles to Change from Dodd-Frank

March 24, 2011 ( - Financial Research Corporation (FRC) foresees significant changes in the core roles, responsibilities, and services provided by brokers, advisers, asset managers, and others in the investment industry as a result of actions proposed by the Securities and Exchange Commission (SEC) under the Dodd-Frank Act.

A research report released by FRC entitled, Reshaping the Financial Services Industry: Operating Under Dodd-Frank, concludes that the brokers and asset managers that quickly and clearly understand the implications of the SEC rulemaking will have a real opportunity for growing market share and profitability.   

According to the report, the industry is undergoing a redefining transformation. An SEC study published in January, Study on Investment Advisors and Brokers, established for the first time that brokers are required to acknowledge their fiduciary status and affirm that they are acting in the best interests of the retail consumer. “Going forward, brokers will be operating under a more stringent fiduciary standard of care. Rather than advice being incidental to trade execution, trade execution will be incidental to advice,” commented Bob Hedges, FRC’s Chairman, in a press release.   

FRC identified many areas in which competitors in the investment services value chain will need to modify their business models, organizational processes, and product development and marketing practices to make advice and fiduciary standing safe, scalable, and easy to execute.   

Stephen Winks, author of the report, commented on the change in the revised role of the broker, and how the entities that support the function of the broker, will be impacted. “Brokers, in their new role as adviser, will be addressing investment and administrative values, such as risk, return and cost structure, on behalf of the customer, and not just selling investment products. That’s not required today. This has industry-wide implications.”   

The FRC report outlines the new technology-based information tools that will be needed, the new capabilities for managing an ever-expanding number of investment portfolios that will be required, new administrative policies for advisors to be created, and the new practice management processes necessary for firms to profitably operate under the new rules. According to Winks, “In parallel with the changing role of the broker, asset managers have the opportunity to provide solutions that go beyond packaged products that have been designed for today’s commissioned sales environment.”   

The report also describes the likely impacts on investment fund types and programs, including mutual funds, exchange-traded funds (ETFs), and managed accounts resulting from the imposition the new fiduciary standard. “We see ETFs as being particularly suited to the new environment because of their lower cost dynamics and greater portfolio construction flexibility,” concluded Winks.   

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