ETF boon under DOL fiduciary rule won't be universal

ETF boon under DOL fiduciary rule won't be universal
Some of the more exotic ETF strategies may be difficult to defend as being in a client's best interest.
JUN 15, 2016
Exchange-traded funds will likely benefit in a big way from the Labor Department's fiduciary rule, but not all ETF products will reap the rewards. The fiduciary regulation, which raises investment advice standards for retirement accounts, will likely lead advisers to steer clear of recommending more exotic types of ETFs unless advisers have a strong case for doing so with particular clients, according to participants Tuesday on an InvestmentNews webcast. “ETFs are absolutely going to be a big winner here,” Dave Nadig, director of ETFs at FactSet Research Systems, said during the presentation, titled “How the DOL fiduciary rule could reshape the ETF game.” Advisers acting as fiduciaries, a label carrying an obligation to serve a client's best interest, is “a big win for products that are clean, simple, low-cost and not full of surprises,” which fits the definition of ETFs closely, Mr. Nadig said. However, the fiduciary rule, released in early April, makes it difficult for advisers to put clients in funds such as coal ETFs and South Korean small-cap ETFs, because the majority of ETF portfolios “don't need to be terribly fancy,” said John Waggoner, senior columnist at InvestmentNews. Mr. Nadig, supporting that notion, said it will be tough to justify using triple-inverse 20-year Treasury funds, or short and levered ETFs, for example. These types of products will still exist, but won't really be sold by advisers — rather, they'll “continue to be the bailiwick” of day traders and hedge funds, Mr. Nadig said. Advisers who use these sorts of funds in retirement accounts such as IRAs will have to be able to stand before a judge in court and articulate how such funds are in a client's best interest, according to Mr. Nadig. “That's a tough argument to make,” he said. Against the backdrop of the DOL's fiduciary rule, passively managed funds have seen steady inflows as actively managed strategies have experienced outflows. In the past 12 months, for example, $287 billion has flowed out of actively managed funds, while passive funds such as ETFs have taken in $177 billion, according to Mr. Waggoner. “The DOL rule will absolutely continue to accelerate that,” said Mr. Waggoner. It's not that active strategies are dead in the water, however — similar to more exotic types of ETFs, advisers will need to demonstrate a defensible due diligence process to a judge to show why a higher-priced fund was in a client's best interest.

Latest News

SEC bars ex-broker who sold clients phony private equity fund
SEC bars ex-broker who sold clients phony private equity fund

Rajesh Markan earlier this year pleaded guilty to one count of criminal fraud related to his sale of fake investments to 10 clients totaling $2.9 million.

The key to attracting and retaining the next generation of advisors? Client-focused training
The key to attracting and retaining the next generation of advisors? Client-focused training

From building trust to steering through emotions and responding to client challenges, new advisors need human skills to shape the future of the advice industry.

Chuck Roberts, ex-star at Stifel, barred from the securities industry
Chuck Roberts, ex-star at Stifel, barred from the securities industry

"The outcome is correct, but it's disappointing that FINRA had ample opportunity to investigate the merits of clients' allegations in these claims, including the testimony in the three investor arbitrations with hearings," Jeff Erez, a plaintiff's attorney representing a large portion of the Stifel clients, said.

SEC to weigh ‘innovation exception’ tied to crypto, Atkins says
SEC to weigh ‘innovation exception’ tied to crypto, Atkins says

Chair also praised the passage of stablecoin legislation this week.

Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest
Brooklyn-based Maridea snaps up former LPL affiliate to expand in the Midwest

Maridea Wealth Management's deal in Chicago, Illinois is its first after securing a strategic investment in April.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.