The Department of Labor's (DOL) new fiduciary rule has some advisors fearing that its requirements will drive away business among new investors and Millennials. The rule will automatically elevate all financial advisors who work with retirement plans or accounts in any capacity to the status of a fiduciary. This means that they will be required to act unconditionally in the best interests of their clients. It also means that advisors must disclose their compensation and any possible conflicts of interest clearly to clients before transactions take place.
An Unintended Consequence
A CoreData Research report from November 2016 conducted a study of financial advisors and their reaction to the fiduciary rule. About seven out of every ten respondents said they will move away from “mass market” feeder markets when the DOL rule goes into effect on April 10 of next year. “In the U.K. after similar regulations were introduced, a certain faction of the industry argued that an advice gap would form with many mass-market investors being left behind,” Will Roberts, a senior consultant at CoreData Research, told Financial Advisor IQ. (For more, see: Fiduciary Rule Uncertainty: How Advisors Are Adapting.)
For most advisors, mass-market consumers are already below their radar screen. However, experts contend that establishing relationships with younger investors, such as entrepreneurial Millennials, will be critical to fostering business growth. It is easy to see why when you consider that a great deal of wealth is set to change hands from the aging Baby Boomer generation to their heirs.
Opponents of the DOL rule contend that the increased compliance costs that will be a direct result of the rule’s implementation will effectively lock out clients with less than $1 million to invest. Roberts stated that his company’s study suggests that a greater number of advisors will detach themselves from mass-markets and focus solely on high-net-worth investors. Critics cite the Retail Distribution Review rule that was passed in 2013, essentially the UK’s equivalent of the DOL rule that is beginning to go into effect. Financial advisors in Britain were worried that the increased compliance costs would translate into higher fees for clients.
However, a study conducted by the Financial Times shows that client fees have actually dropped by 10% since the implementation of the rule. Although this drop is much smaller than what consumer advocates had predicted, it provides evidence that implementation of the DOL rule may not necessarily lead to higher costs for clients.
But many advisors disagree. Dean Harman, an advisor in Houston and member of the board of directors for the Financial Services Institute, told Financial Advisor IQ, “Although market structures are much different in the U.S., implementation of the DOL rule here will also raise costs for broker-dealers and advisors. To think that profit margins in this industry won’t come under more pressure by the DOL’s increased regulation is sort of Pollyanna-ish at this point.” (For more, see: The DOL’s Fiduciary Rule Requires a Holistic Approach.)
Harman disagrees with some estimates that predict the rule will lead to big savings for investors. “They looked at very general factors that were most convenient to making their case – they didn’t look at all of the variables that advisors and broker-dealers must confront on a daily basis,” he said. Many others also believe that the increase in the amount of necessary paperwork and liability exposure to clients will almost certainly translate into higher fees.
Other advisors who are already working under the fiduciary model don’t see the new regulations as having a substantial impact on their bottom lines. Mark Shepherd, from Shepherd Financial Partners, says that the new rule won’t likely affect his business much at all. He told Financial Advisor IQ that, “After 28 years of operating as true fiduciaries for people, we don’t see anything in these new regulations that will force us to fire any clients or raise our fees. In effect, we’ve been operating within the spirit of such regulations since we opened.”
The Bottom Line
Time will tell how the DOL fiduciary rule will impact the financial industry following its initial implementation, and there is a possibility that it might not survive in its current form. Several of Donald Trump’s advisors have stated that they plan to nullify the rule one way or another, and there have already been several lawsuits filed against it. Whether you believe that the rule will cause drastic change throughout the industry or not, it will be a point of contention among advisors for as long as it stays on the table. (For related reading, see: Trump Advisor Promises Repeal of Fiduciary Rule and Can Trump Roll Back the Fiduciary Rule?)