“Firms are moving to level compensation, changing their fund lineups, dropping their 12b-1 fees altogether,” Slavin said.
Financial technology companies will play a “key role” in meeting the requirements of the fiduciary rule, said Morningstar. Advice and investment management made scalable by technology will be in higher demand, and more firms will create partnerships or launch in-house digital advice providers as a result of the rule.
More than $1 trillion in assets could shift to passive investment products in the rule’s wake, said Morningstar, with $140 billion coming directly from broker-dealers moving to a fiduciary standard. Companies providing suites of passive, index-based products like Vanguard, Charles Schwab, BlackRock and State Street stand to benefit.
More than $200 billion in annual IRA rollovers will likely fall under the rule, said Morningstar.
“Rollovers can actually continue as they are today when using the full best-interest contract exemption,” said Slavin. The best interest contract exemption, or BICE, permits most existing compensation structures to continue as long as the advisor signs a contract acknowledging his or her fiduciary status, adheres to ERISA’s impartial conduct standards, discloses information regarding any fees and potential material conflicts of interest, and maintains records demonstrating his or her continued adherence to contract standards.
In order to roll over client assets into an IRA, Morningstar said that wealth management firms will also have to show why the rollover would be in the clients’ best interest and show them what the benefits are for extra costs they might incur.
Active asset managers like Eaton Vance, Invesco, Legg Mason and AllianceBernstein will need to rework their payment structures, said Morningstar, to revise and possibly eliminate revenue-sharing agreements and 12b-1 fees.
Companies with hybrid services like Raymond James will likely adopt the fiduciary methods for their taxable accounts to avoid having two different systems and to avoid giving clients the perception of two differing service levels. For this reason, the advisor forces of full-service wealth managers like Raymond James and the wirehouses will likely consolidate in the rule’s wake.
Even level-fee RIAs would be subject to the standards of a streamlined best-interest contract.
Morningstar said that with the potential reduction in rollovers, retirement plan providers could benefit because more assets will stay on their platforms. But net inflows to wealth management firms will decrease.