The U.S. Department of Labor’s proposal to apply a fiduciary standard to all financial advisors providing investment advice for a fee to a retirement account plan or participant is a supercharged issue within the financial services industry. In a recent report by Morningstar Inc., the investment research company said the proposed rule could be a “game changer” for the U.S. wealth management industry.
The DOL wants to extend its own fiduciary standard for retirement plans under the Employee Retirement Income Security Act of 1974, which is considered more stringent than the fiduciary standard governing investment advisors under the Investment Advisers Act of 1940. DOL’s proposed rule change would allow advisors to continue receiving payments that could create conflicts of interest if they meet the conditions of proposed exemptions to the rule. But opponents of the proposal claim the rule would create costly and complex hurdles that could make commission-based individual retirement accounts economically unfeasible to serve.
“It will drastically change how investment product distribution is done, how advisors are paid and how individual investors are served,” Michael Wong, Morningstar equity analyst and lead author of the report, says in an interview. The report says the proposed rule would create winners and losers in the financial services industry based on investment product choice and business models.
The Winners:
• Discount brokerages, such as Charles Schwab and TD Ameritrade, and robo-advisors could grab a share of the estimated $250 billion to $600 billion of low-balance IRA assets that might be abandoned by full-service wealth management firms.
• Exchange-traded product sponsors, including BlackRock, State Street and Vanguard, as well as index providers, such as MSCI and the London Stock Exchange (owner of the FTSE and Russell indexes), would gain from an accelerated movement to passive investment products.
The Losers:
• Some alternative asset managers could be hit by the rule because specific alternative investment products weren’t included on the list of assets that the best-interest contract exemption can apply to, Morningstar posits.
• Life insurance companies. “Given the often higher commission rates of particular annuities and vertical integration at some life insurance companies, certain life insurance companies will be challenged by the rule,” Morningstar says.
Mixed Bag: