Winners and losers in the murky DOL fiduciary rule implementation

There’s plenty of speculation as to what will happen with the implementation of the Department of Labor rule that holds advisers for retirement plan participants to the fiduciary standard. Whether the rule is delayed, amended or implemented, only time will tell. In the meantime, let’s discuss the new uncertainty and its impact on the wealth management industry. We should all understand that the rule is well past the tipping point and the industry is forever changed regardless of the rule change. Let’s review the three key areas of impact.

1. How we deliver our services. The transition of advisers to the fiduciary standard has been occurring for well over a decade and most firms have been on a fast track to adapt over the past year and a half. While the DOL rule expands the application of the standard, the vast majority of brokers, even at the big brokerage firms, already have a growing plurality of their clients and assets being held to the fiduciary standard. The fastest growing segment of the industry is the independent RIA channel that already holds itself out as fiduciaries. The DOL rule might be an accelerant, but the move to the fiduciary standard for everyone is already happening.

2. How we get paid. As above, most advisers, whether independent or linked to a broker-dealer, have been shifting to fee-based compensation. The most vulnerable to a reduction or abolition of commissions in retirement plans are the independent broker-dealers. Roughly 50% of their revenue is commission-based, but many firms also receive sponsorship fees from vendors. As much as half of many independent broker-dealer assets are in retirement plans. The big full service wirehouses and banks can withstand the revenue setback, but the majority of independent broker-dealers work on razor-thin margins and cannot afford the loss of revenue. The large packaged product providers have already been suffering through asset outflows from expensive actively managed funds to low cost index products. Again, the DOL rule is an accelerant and its deferment would give the independent broker-dealers and mutual fund and annuity providers more time to adapt, but it doesn’t change the secular shift away to low cost index products and standalone RIAs.

3. The legal ramifications. One of the most contested areas of the DOL rule is the legal recourse aspect. The rule allows clients to pursue class action claims in civil court rather than settle disputes through arbitration. This would be a massive windfall to the legal profession and increase legal defense costs for the wealth management industry (even for those compliant with the laws.) The threat of reputational damage from public litigation is one that would greatly entice the legal profession to encourage advisers and their firms to settle disputes, even if they are compliant with the regulations. Like the medical profession, insurance premiums for advisers will go up and eventually these costs make their way to consumers. More importantly, this amendment will likely ultimately harm consumers by making legal recourse a long, excessively expensive and complicated process.

FIGHTING YESTERDAY’S BATTLE?

With our new President in office, there is a renewed debate about job losses overseas, when in fact our bigger concern should be how digitization and machines are taking over human jobs right here at home. In the same vein, we might all be concerned with the immediate changes in the regulatory landscape, but consumers are moving to new relationships with their financial advisers regardless of the rules. Nothing will stop the shift in the industry to a fiduciary, tech-enabled relationship with ever compressing fees. Consumers want it, and technology is making it happen almost as quickly as the DOL’s rule change.

HELLO, FUTURE

The rule was intended to help the average plan participant. If implemented, most aspects of the rule are generally helpful for consumers except the legal recourse process which many would argue is effectively an operating tax to every fiduciary in the country. Most of the industry is braced for the change. If the DOL rule is deferred or not enforced, the free markets are actively taking care of the major concerns anyway. Like the Affordable Care Act, Obama’s policy might be changed, but there’s no going back to the old world.

Joe Duran is chief executive of United Capital. Follow him @DuranMoney.