What are the potential effects of the U.S. Department of Labor’s (DOL) proposed fiduciary standard on the financial services sector?

Read: Economist quits over fiduciary rule study

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.

Read more here.

Also read:

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FINRA dismisses bizarre claim against advisor

Originally published on Advisor.ca

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