Market turmoil poses risk to brokers going fee-based in wake of DOL fiduciary rule

Broker-dealers are examining their revenue streams as they seek to adapt to the Labor Department’s fiduciary rule amid heightened concerns about market volatility and regulation.

Many see the new rule, which requires advisers to act in the best interest of clients saving for retirement, speeding up a shift toward fee-based relationships as commissions become increasingly scrutinized for conflicts.

That acceleration might make sense. But some advisers are concerned the well-intentioned regulation is casting a shadow over all revenue that’s generated from commission-based relationships, even when they make the most sense for investors, according to brokers who attended the fiduciary-focus roundtable at InvestmentNews in New York last Friday.

While commissions may decline in a volatile market where jittery investors refrain from trading, an even bigger risk of losing clients in a fee-based relationship could arise, Michael Karalewich, CEO for Nationwide Planning Associates Inc., said during the roundtable. Seeing the toll that market turmoil has taken on their accounts, investors may question why they’re paying any fee at all just to sit on the sidelines, he said.

“I would be nervous if we had 100% of our revenue” tied to fee-based accounts, Mr. Karalewich said. “It’s just too hard to predict.”

Market volatility was the top concern among financial advisers in the first-quarter, with 28% flagging it as top of mind compared to 19% in the fourth quarter, according to a survey released Monday by Fidelity Institutional Asset Management.

The survey also reflected increased attention on the election season and the DOL’s fiduciary rule, with the political and regulatory landscape ranking No. 3 among their concerns behind portfolio management. Sixteen percent of advisers said they were focused on the government and the economy, up from 12% in the fourth quarter.

The new fiduciary rule, released last month, seeks to protect nest eggs from brokers who push expensive investment products in order to collect higher commissions.

Many brokerage firms will seek to diversify their revenue mix in anticipation of pricing pressure on traditionally higher commission products, such as annuities or non-traded real estate investment trusts, according to attendees at the roundtable.