Fitch: DOL Fiduciary Rule Effects… Will Vary

By ASPPA Net Staff • December 13, 2016 • 0 Comments
Fitch Ratings has weighed in on what it thinks the impact of the Department of Labor’s (DOL) fiduciary rule will be on wealth managers.

The bottom line? The effect will vary, according to the report.

In no small part, the difference in impact is a result of the different approaches that various firms have opted to take in response. Fitch notes that while Bank of America and JP Morgan Chase have announced that they will move to a purely fee-based model for retirement accounts with set fees charged as a percentage of assets, Wells Fargo recently announced that it would continue to allow brokers to charge per-transaction commissions, and Morgan Stanley and Edward Jones have also announced that they would maintain commission-based compensation models for retirement accounts.

There will be varying advantages and disadvantages for wealth managers depending on whether they pursue a fee-only or commissions model in response to the DOL rule.

Fitch notes that switching to fee-based compensation will mean a simpler product structure and would make revenue generated from these accounts more recurring and potentially more predictable. A fee-based structure could also mean less opportunity for brokers to overtrade client accounts, thus reducing potential legal liability from the introduction of the fiduciary standard. However, it cautions that these financial institutions could risk losing brokers or smaller clients who do not benefit directly from the introduction of fees.

On the other hand, those institutions sticking with commissions will see greater broker retention, according to Fitch. The report claims that it will be more cost-effective for clients who have limited trades per year, but that interactions and account orders will need to be well documented to ensure higher compliance standards are met, and “this will come with greater operational, compliance and legal costs,” according to the report. Notably, the potential cost of noncompliance could be a significant legal liability, according to Fitch.

The analysis notes that the DOL rule could also have indirect effects on segments of the financial industry not directly targeted by the rule. For example, investment managers could face further outflows from actively managed products in favor of passive products deemed to more easily satisfy the fiduciary standard, which, in turn, could pressure investment managers’ fee rates. Additionally, the report notes that insurers could see an increase in compliance costs from the DOL rule as well as changes in some sales practices, although Fitch maintains that the rule is ratings neutral for that sector.

As for the impact, if any, of the change in administrations, Fitch notes that while there is “market speculation” that the Trump administration may seek to modify or delay the implementation of the DOL rule, “it remains too early to make any prediction on what specific regulatory changes will be implemented.”




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