Menickella says that the changes will restrict the funds and share classes advisors can offer to things with minimal fees—meaning an end to share classes that involve revenue sharing with advisors or brokerage reps, and likely the elimination of 12b-1 fees.
Steven Dudash, president of IHT Wealth Management, a Chicago-based RIA, supports the rule, but says it will eliminate smaller and less-efficient firms when some of their revenue streams dry up.
“Formalizing this will squeeze out many small players, and we will see further consolidation as a result in our industry,” says Dudash. “Size will matter, scale will matter, true expertise will matter. The small, inefficient and unqualified firms and advisors will get forced out. And that is a very positive thing for the industry and for retail investors.”
The squeeze will occur because of fee compression, says Ross Gerber, president and CEO of Gerber Kawasaki Wealth and Investment Management, a hybrid RIA in Santa Monica, Calif.
Gerber predicts that in the absence of A share funds and 12b-1 fees, advisors will have less incentive to work with smaller accounts.
“Basically, only small clients will be hurt, as no one will work with them except computers or robots,” Gerber says. “Unfortunately for them, pure play ‘robo advice’ is not truly financial advice, and many people need actual financial advice. If the intent is to help people pay less in fees, that will work, but it will also mean they get no advice. I can’t see how this improves the world. With all the information on the Internet, clients are informed about loads and fee structures and should have a choice which way they want to pay.”
Gerber says the eventual fallout from the fiduciary rule is likely to be chalked up as proof of the law of unintended consequences: “Like all things the government does, they mean well but end up hurting the very people they are trying to help, with the prime recent example of this being Obamacare. The new DOL rule is Obamafinance. However well-intentioned it is, it’s unfortunately only going to cause more of a mess in our industry and for many retail investors. There will be some good that comes out of all this, but mostly it’s a nightmare.”