The U.S. Department of Labor’s fiduciary guidelines for handling money in retirement accounts, slated to become the law of the land next April, has put the fear of God into many money managers. Or at least the fear of regulators. The upshot, according to Cerulli Associates, is that portfolio construction in the post-DOL world will drift toward safe, low-cost sameness. 

In the third-quarter edition of the Cerulli Edge, the Boston-based financial research firm said it spoke to leaders in the managed accounts industry about portfolio construction, and the feedback it got was that the DOL’s conflict-of-interest rule is a major challenge to the way they currently construct portfolios for retail clients. The consensus is that the new mandates governing retirement accounts will accelerate trends toward passive investing and lower-fee products. As one money manager told Cerulli, there’s a wholesale re-engineering of the industry going on.

For example, some money managers say they’ll focus more on risk rather than return when building model portfolios for advisors in an effort to dampen volatility—even at the cost of forgoing alpha. Some advisors might bristle at these risk controls. But according to Cerulli, one of the takeaways it got from its interviews with executives in the managed account space is that many advisors don’t fully grasp the risk embedded in the portfolios they create for clients, and that includes underestimating exposure to equity risk in diversified portfolios.

One of the conclusions of the Cerulli report is that the greater emphasis on risk control will shine a brighter spotlight on low-cost, passive exchange-traded funds, which in turn will leave more investors owning look-alike portfolios laden with me-too funds from industry giants BlackRock, Vanguard and State Street Global Advisors. 

“Portfolios are going to become boring and homogeneous,” one leader of a sponsor investment team told Cerulli.

Several executives interviewed by Cerulli offered that the long bull market has blinded investors to the risk of overexposure to passive funds. These executives said they believe that portfolios should have a combination of active and passive funds to potentially help mitigate losses when index-tracking funds do a collective swoon.

Regardless, ETFs will certainly be more in demand in the post-DOL era. In that vein, Cerulli expects all advisor types that it tracks to boost their allocations to ETFs from an average of 12.6% in 2016 to 15.7% in 2018. Leading the way are registered investment advisors, who Cerulli forecasts will up the amount of client assets invested in ETFs from nearly 26% to 29.5% during that time frame.

But again, the move into passive, index-tracking funds in the post-DOL world (which was an ongoing trend even before the rule went down) could make the investment landscape look like a cookie-cutter housing development. 

“As portfolios become similar, it will become increasingly difficult for advisors to differentiate themselves through portfolio construction and investment selection,” the Cerulli report says. “To set themselves apart, financial consultants will have to focus on other higher order investment advisory activities, especially goal-based planning.”