What are the potential effects of the U.S. Department of Labor’s (DOL) proposed fiduciary standard on the financial services sector?
According to a Morningstar report, the rule could drastically alter the profits and business models of investment product manufacturers and affect approximately $3 trillion of client assets and $19 billion of revenue at full-service wealth management firms.
Key takeaways of the report include:
- Full-service wealth managers may convert commission-based IRAs to fee-based IRAs to avoid the additional compliance costs of the DOL rule. As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry.
- Robo-advisors stand to benefit from the DOL rule, as they pick up a portion of an estimated $250 billion to $600 billion of low-account-balance IRA assets from clients let go by the full-service wealth management firms.
- More than $1 trillion of assets could flow into passive investment products due to the DOL rule. The increase would be from higher adoption of robo-advisors, increased usage of passive investment products, the proposed “high-quality, low-cost” exemption, and the effect of advisors trying to balance out higher explicit financial planning charges.
- Beneficiaries of the rule will be discount brokerages like Charles Schwab and TD Ameritrade and index and exchange-traded product providers like BlackRock, London Stock Exchange, MSCI, State Street, and Vanguard.
- There will be a mixed effect on active asset managers and full-service wealth management firms. Both groups will be materially affected by the prohibition on third-party payments. However, firms with economic moats, or sustainable competitive advantages, will either gain market share from their less-competitively advantaged peers or will be able to adjust their business model to offset the negative financial effects of the rule.
- Some alternative asset managers, such as Apollo Global Management, and life insurance companies, like Ameriprise Financial, MetLife, Principal Financial Group, and Prudential Financial, will be challenged by the rule.
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