How the DOL rule will change the product mix and portfolio constructions advisors offer

The following is an excerpt from a new research paper, “Shifting the foundation: How the DOL fiduciary rule will change retirement planning and the services advisors provide to clients.” The paper, based on a survey of the InvestmentNews audience of financial advisors, was developed by InvestmentNews Research and sponsored by Nationwide.”

As a result of coming regulatory changes and the current low return environment, the product mix offered by advisors is apt to change in the near term. Traditional income products are less likely to be used than in the past, while greater longevity and rising healthcare costs will place greater emphasis on the need for income. These forces will call for new approaches to portfolio construction.

Currently, advisors say that the prime consideration for selecting products and strategies for a retirement income portfolio is how the product/strategy complements the overall investment objective of the client or portfolio. That response was cited by 52% advisors, and clearly led the second-most important consideration, “total return,” cited by 14%.

In terms of investments, the most frequently used products by advisors currently are actively managed mutual funds (87%), passively managed mutual funds (72%), passively managed ETFs (70%), stocks (68%) and bonds (61%).
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Other products, which currently are used by many advisors to generate retirement income, are likely to be less used in the future. The survey revealed, for example, that 49% of advisors would be less likely to recommend non-traded real estate investment trusts in retirement portfolios in the post-DOL world. Costs and compensation considerations also are likely to diminish the use of variable annuities (cited by 48% of advisors), private placements (43%), business development companies (35%) and master limited partnerships (32%).

Turning away from these products will require advisors to create more customized portfolios, perhaps using products including municipal bonds, closed-end funds, deferred income annuities, and preferred and dividend-oriented stocks, whether directly or through mutual funds and exchange-traded funds.

As product providers innovate and create variable annuities that meet the requirements of the new regulation, variable annuities are likely to continue playing an important role in advisors’ retirement planning of guaranteed income for clients.

To learn more about where the opportunities exist for advisors to transform their business models, please download the full research report here.