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What clients don't know can hurt you

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HOLLYWOOD, Florida -- As hard as financial institutions have been working to implement the fiduciary rule, the toughest part is yet to come: explaining it to customers.

Between 25% to 50% of investment consumers, depending on the segment, have never heard of the rule, and those who have don't know what it means, said Wayne Cutler, moderator of a panel at the BISA convention here on Thursday.

Cutler, an executive vice president at analytics and advisory firm Novantas, added that the mass market was the least likely to be aware of the rule with 50% saying they never heard of it, according to a new research report that his firm and Informa Research Services recently completed.

"There's a huge communication challenge that banks and advisers are going to have," said Cutler.

Educating clients about the rule, however, may have some drawbacks, according to the research. Once the rule was explained to customers, many became concerned about the advice they received in the past.

For many, the adoption of the rule was a way "to stop something they [advisers] shouldn't have been doing in the past," said Cutler.

As a result, almost three in 10 customers (29%) would consider switching to a different financial institution and abandoning their financial adviser.

"You want to make sure you're talking to your customers," said panelist Tom Mudlaff, senior vice president at Capital One Investing, referring to the risk of losing clients in the wake of the fiduciary rule.

It's unlikely that 29% of customers would indeed ditch their advisers and financial institutions, according to Cutler. It's easy for customers to say that they are going to investigate switching but to actually act on it takes effort, Cutler said. He estimates that roughly one-third of those saying they'd consider switching would actually do it.

Overall, bank wealth executives were generally supportive of the rule, saying it would help rid the industry of bad actors, according to 12 executive interviews conducted as part of the research report.

The executives worried, however, that it would negatively impact the mass market, which needs advice the most. Mass market customers, unlike affluent customers, hold the bulk of their retirement assets in 401(k)s and IRAs and are the least comfortable using robo platforms, according to Cutler.

They were also concerned about the amount of time needed to complete the best-interest contract, saying customers have limited time. In addition, they were concerned about litigation costs and having fewer product offerings.

They also complained that the rule was too narrow, saying that it should cover all investments and not just retirement accounts.

It can lead to awkward client conversations, said panelist Vance Richard, program manager at Iberia Financial Services. "For your qualified account, I have to do what's best for you. I don't have to over here."

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