One unintended consequence of DOL fiduciary rule

While the Labor Department’s newly released fiduciary rule has inspired much discussion among industry stakeholders speculating how the regulation will adversely affect the advice business, there’s a potential silver lining: a younger industry.

Providing financial advice is predominantly the business of older advisers — among regional brokerages and wirehouses, for example, many top producers are 50 years old or more. As a result, many believe there’s a shortage of young advisers in the industry.

The DOL rule, which raises investment advice standards for retirement accounts, could change that, according to Jamie Hopkins, an associate professor of taxation at The American College of Financial Services. It would be a positive development, because the industry has had trouble attracting young people to its ranks, Mr. Hopkins said.

(More: The DOL fiduciary rule from all angles)

The rule is expected to drive a massive shift in the advice industry, as stakeholders reform compensation models, engage in mergers and turn to different investment vehicles, for example, as various ways of meeting new compliance standards.

Some older advisers, rather than go through this sea change, may decide to leave the industry altogether and sell their business, with millennial advisers being the ultimate buyers, Mr. Hopkins said. Indeed, nearly 60% of advisers said they anticipate the fiduciary rule, released in its final form April 6, will cause a wave of early retirements among advisers, according to upcoming research conducted by InvestmentNews in partnership with asset management firm Legg Mason.

“It’s a very good opportunity for younger people coming into the business, because they aren’t afraid of the change as much,” Mr. Hopkins said Monday at InvestmentNews’ 2016 Retirement Income Summit in Chicago.

An adviser who’s only been in the industry five years likely won’t view the fiduciary rule as the disruptive force an adviser who’s been around for decades might, so they won’t be as intimidated by the change, Mr. Hopkins said.

Supporting Mr. Hopkin’s notion, Colleen Bell, first vice president of fiduciary services at independent broker-dealer Cambridge Investment Research said the firm has heard advisers and brokers are considering leaving the industry due to the large amount of work necessary to comply with the regulation.

Wirehouses and broker-dealers will likely have more work to do in this regard than registered investment advisers, she added.
“This is a seminal change on the financial services business,” said Matthew Schiffman, the head of global marketing at Legg Mason.

The majority of independent broker-dealers, wirehouses and regional brokerages believe the DOL’s rule will negatively impact the profitability of their practice — more than 80% of IBDs, and 65% of wirehouses and regionals, see an adverse effect, compared to 38% of RIAs, according to the InvestmentNews study.

(This article has been updated to correct Matthew Schiffman’s title to head of global marketing at Legg Mason. A previous version incorrectly stated he was the head of U.S. retail distribution at the firm.)