Financial advisers are anticipating widespread changes in their industry as the Department of Labor's fiduciary rule is phased in over the next 18 months.
The rule that promulgates a best-interest standard for all retirement advice will put billions of Americans' retirement savings in motion, change the investment products advisers use, and hurt firm profitability, according to
an InvestmentNews research report sponsored by Legg Mason. About 1,700 advisers from all channels were polled for the report before and after the final rule was published.
Advisers expect the rule to put sizable amounts of assets into play as the compliance requirements and legal liability risk make servicing small retirement accounts untenable for some.
(Related: Advisers now grappling with how to adapt to the DOL fiduciary rule)
About 40% of advisers said they will not, or probably will not, continue to service small individual retirement accounts — those less than $25,000 — once the rule takes effect, according to
the InvestmentNews survey.
Using industry data along with the survey numbers, the rule could set into motion about $109 billion of assets in low-balance IRAs overseen by the independent broker-dealer channel and $225 billion in assets from wirehouse and regional brokerage advisers.
A significant amount of assets also will be shifted from high-commission investment products into cheaper ones, the survey predicts.
About 57% of advisers said they plan to use variable annuities less in retirement accounts,
the InvestmentNews survey found. Use of nontraded real estate investment trusts will fall 45% and private placements 37%, the report said.
Meanwhile, advisers said they'll use more separately managed accounts, passively managed exchange-traded funds and actively managed ETFs. Use of those will increase 16% to 30%, according to the survey.
“Passive, low-cost funds will set a standard against which many advisers' decisions are measured, as firms with variable compensation structures and parallel product offerings will have a higher burden demonstrating that they are acting in their clients' best interests,” the report said.
The rule also will impact the economics of advisory firms, especially in certain channels, as it's expected to hurt revenue and increase compliance costs.
About 83% of advisers affiliated with independent broker-dealers and 82% of dually registered advisers expect the DOL rule to have a negative impact on the profitability of their firms. About 38% of registered investment advisers said the same.
The rule is not going to act as a de facto ban on commissions.
About 45% of advisers said they will continue to sell commission-based products using the best interest contract exemption, or BICE, laid out in the DOL rule, the survey found.
Advisers do expect the rule to cause commission-based revenue to drop by about a third in 2017.
Eric Bishoff, president and CEO of Bishoff Financial Group, a hybrid advisory firm, said the requirements in the final rule were not as onerous as those proposed in April 2015. “The DOL had come out with a very bold plan of action for wide, sweeping change, and the teeth were taken out of it,” he said.
That easing likely led to more advisers seeing the rule more favorably.
About 21% of advisers polled the week after the rule was published supported the regulation, up from 14% of those surveyed in March.
The portion of advisers opposing the rule after it was finalized was 49%, down from the 72% who opposed the draft measure in March.
For a free copy of the report,
click here.
