Leadership Perspectives | 05.09.18
Candid Conversations with Mike Miroballi: Part 2
This is part two of our Candid Conversations interview series with Mike Miroballi of The Huntington Investment Company. Read part one here
Part one of our interview series with Mike Miroballi focused on his background in customer service and building out his own advisory programs. Now, the conversation focuses on the challenges and programs put in place because of the DOL Fiduciary Rule, retirement plans for baby boomers and smarter client segmentation. Read Miroballi’s expert insights below.
On Responding to the DOL Fiduciary Rule
Let me ask you about this challenge. Over the past year or two, it seems to me that the biggest issue the industry has been facing is the Department of Labor Fiduciary Rule and the implications coming from it. Investment News
surveyed 57 independent broker/dealers and found that firms were posting a 17 percent year-over-year increase in operating costs because of the increased cost related to technology compliance, training and preparation for the rule. How has Huntington been dealing with this, and what major changes have you seen implemented?
I’d say there are a few major changes coming out of the fiduciary rule. The first being a need to look through your compensation structures to make sure that you are eliminating the conflicts that existed for a long time between having differential compensation across products and product types. It's very hard to completely neutralize because products have different characteristics, whether it’s a fee-based product or a commission-based product such as an annuity or mutual fund. They all have different characteristics and levels of complexity. It's hard to get into an environment of a pure-level comp when it comes to brokerage products, but you can balance it to really reduce any type of conflict that might emerge from product selection.
The second major thing is around the products that you're offering and making sure that you have very good product due diligence. Historically, on the managed-money side, that's existed, but I don’t think it historically has been as strong on the broker/dealer and the insurance sides in terms of really doing comprehensive due diligence and ongoing monitoring of products. We've had to step up our oversight of products outside of just the advisory business and have very good, solid due diligence in monitoring all of our annuities, mutual funds and insurance products.
The third thing that I think has been important — and will continue to withstand even if the fiduciary rules are altered to a moderate or significant degree later — is having the right level of diligence around making recommendations. Now, it was focused on the IRA because that is kind of the purview of the DOL. However, being able to really be transparent and have documented conversations around the decision to roll over from a 401k or from an IRA into another IRA account is education that's necessary for clients so they understand the different options that are available and what the implications of those options would be. That conversation and then the technology behind it to support it through these 401k-analyzer types of systems has made that conversation with the client of a higher quality.
As products become more look-a-like and product manufacturers and wholesalers are having to work in a transformed environment, how do you see these firms competing for your business in the future? Does the value proposition that the insurance company brings to you have to change in some way? How do you see that playing out?
I really think that there'll still be an ability to differentiate based on your product offering to some degree. I also believe that firms like ours are really looking for more from product partners than just coming in and focusing on your product. What’s most important is bringing content, education and training to our advisors. This is what makes them better advisors. It doesn't necessarily make them better at selling your particular product. You'll benefit from a higher-quality conversation that our advisors have with our clients if we're doing more business, generally, but it's also coming to the table with content and education that really helps increase the skill level of advisors and their effectiveness with clients. To me, those are the kind of product partners I want.
My experience would put me in absolute agreement with that. In 90 percent of the cases in the field, if the wholesaler adds value to a relationship, you're typically rewarded with more business.
: I believe that the timing of DOL mattered a lot because DOL didn't happen in a vacuum. It was published at the same time that Fintech was making rapid advancements. Where these forces have come together has ignited an acceleration of the commoditization of advice and products. This commoditization ultimately may prove to be the gravest threat that bank financial services programs face. The only salve to the wound of decreased revenue is attracting more customer assets. How do you think about the strategies necessary to achieve this?
Having the ability to deliver more of a holistic planning experience to the client will give you the edge to be able to be the beneficiary of asset consolidation. The biggest opportunity we have in our industry for the next 10 years is still the retiring baby boomer. Trillions of dollars moving out of defined contribution plans into IRA rollover accounts. That’s a huge opportunity. Now that there are other opportunities, that’s not the only one. We want to think about the emerging affluent as well as the next generation to move up because they're going to be the ones who inherit a lot of this wealth that transfers from older generations to the younger generations.
However, just looking at the retiring baby boomer, there is going to be a period of consolidation as people approach retirement. In order to position yourself to be a destination point for that consolidation, you must have better conversations; you have to be the
trusted advisor, and I don't know any way to do that beyond delivering that planning experience.
If you look at conversations around fintech, and particularly the robo-advisor, it was about replacing the human advisor. You don't hear that anymore. In fact, that robo conversation is transferring to more of a digital enablement. Now, it’s incumbent on us to become much more efficient in how we deliver through multiple channels, not just face-to-face but through virtual and digital channels as well.
On Providing Better Services for Baby Boomers
I’ve spent the past 10 years working on baby boomer opportunities, as a commercial enterprise and a director of a nonprofit think tank. First a comment: I believe DOL made a big, big misfire when it comes to retirees. DOL is all about costs when it really should have been about risks, and I say that because you can give a retire needing income a low-cost portfolio — in fact, you can take all the loads out of the portfolio — but retirees will very easily go broke in retirement if they have the wrong behavior, the wrong methodology, the wrong product allocation. DOL did nothing in that context to help the retiree in my judgment.
In that regard, I think that one of the great business opportunities that we face, an opportunity that really could dramatically increase business, is to segment clients differently. Traditionally, we've segmented clients according to the level of AUM. And when they are in the accumulation phase of their lifetimes, I think that makes a lot of sense. But when they get to retirement, I believe that if we have a different construct to look at the client, we can then develop better services and win more assets. Let me tell you what I mean more specifically. There are three ways to think about segmenting the retiree client. One is, over-funded customers. They are the lucky minority who have more money than they need to deliver the current income that they're looking for. They can use any methodology that they want to, and they'll be just fine. At the other end of the spectrum, you have underfunded customers who have very little on the way of capital savings. They're going to rely primarily on social security, and they're not classically good prospects for financial advisors. But in the middle, you have a group of people who represent about 6.2 trillion dollars in savings, who I refer as constrained investors. Those are folks that have money when they get to retirement, but the amount of money they have is not high relative to the amount of income that they're looking to achieve.
This doesn’t mean a low balance. What it means is these folks have very little margin for error. They need to be disciplined about their saving. To me, where a lot of firms and advisors miss the point is that these clients also need guaranteed income incorporated into their strategies because risk mitigation becomes the most important deliverable here. What happens if I take a bad year to retire like 2000 or 2008? They also need to be protected against inflation and longevity risk. In other words, to properly serve these customers, they really need an elegant blending of insurance and asset management in a way that provides them a strategy that's durable and creates better behaviors. I know that's a long assertion I just made, but does it resonate with you as being correct?
Completely. Yes. I mean, when you think about the risk that a pre-retiree or a retiree faces once they're moving away from the accumulation phase, if you have a period of a down market, or you have an event that happens that requires you to draw more, your ability to replace draw down is gone or is extremely curtailed. If you have a health issue — or you have somebody in your family that has a health issue and it requires you to draw down your savings — well, those are not things you necessarily anticipate or can plan for in retirement. They can be incredibly disruptive to your retirement plan. That's not something you can predict, but you can plan for the possibility.
On Modifying the Practice Model
Let's now think about this in the context of the fiduciary role and the responsibility to be a fiduciary to customers, remembering that fiduciary responsibility is really two-fold. It's loyalty, but it's also competence. How do you think this in the context of an advisor working in income planning with a constrained investor? What are the liability implications when an advisor takes the position, “I don't deal with guaranteed income. I don't embrace annuities.” My view is that advisors aren’t meeting fiduciary responsibility unless they construct the proper risk mitigating strategy for the client.
Do I think that is how the regulators will look at it? No. But I think that is at a level of understanding of the dynamics of investment planning that goes beyond where personal experience is able to draw — and it's really hard to regulate that. I mean, to me, its principles of planning, not limiting yourself from any products that could be a potential solution for your client. Yes, allowing your personal biases to preclude you from offering the right solution, to me, that is not completely fulfilling your fiduciary responsibility, but keeping in mind though that there are constraints out there just from being practical. If you are an RIA, you're likely not going to have those types of products available for your clients. If you're an RIA and with a broker/dealer, possibly so. Sometimes your practice model may dictate what you have available to serve clients.
To read part one of the Mike Miroballi series, click here.